China and Japan Agree to Far-Reaching Currency Pact

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China and Japan Agree to Far-Reaching Currency Pact

According to a set of groundbreaking new agreements, China and Japan may soon be trading with each other using Chinese yuan instead of American dollars.

Tokyo and Beijing announced a series of broad, innovative financial agreements on Sunday that could potentially change the status quo of this world’s financial system.

According to these agreements—which were reached between Chinese Premier Wen Jiabao and Japanese Prime Minister Yoshihiko Noda—China and Japan may soon be trading with each other using their own national currencies, without first converting to American dollars. The agreements will also allow Japan to hold Chinese yuan in its foreign exchange reserves, which are now largely dollar-denominated.

While an implementation timetable for these reforms has not yet been released, the fact that these reforms were agreed to in the first place highlights the reality that economic woes in both Europe and America have investors looking for safe investment alternatives to the dollar and the euro. This is why leaders in both China and Japan are willing to downplay past political differences in an attempt to integrate their economies.

Chinese and Russian leaders forged a similar agreement last year and have already started trading with each other using yuan and rubles, instead of dollars.

All of these economic agreements are significant for three primary reasons:

The first reason these agreements are significant is that they herald the beginning of the end of the dollar’s reign as the global reserve currency.

Respectively, China and Japan are the world’s second- and third-largest economies. These two nations are also the two largest creditors to the United States, with China holding most of its $3.2 trillion foreign exchange reserves in American dollars. Obviously, any currency deal that allows either China or Japan—much less both—to move away from using dollars holds the potential to inflict a painful blow to the dollar’s reserve currency status.

For more information of this development, reference our article “The End of the Dollar System.”

The second reason these agreements are significant is that they point to a coming era of Asian unity.

China and Japan are historic enemies; that is what makes these accords so striking. After centuries of conflict, Japan appears to be waking up to the fact that China is going to be the dominant power in East Asia. In the words of Barry Eichengreen, an economics historian at the University of California, Japan “seems to be acknowledging implicitly that there will be a single dominant Asian currency in the future and that it won’t be the yen.”

Current financial conditions are forcing the Japanese to pragmatically reevaluate their current alliances. With China on the rise and America on the wane, leaders in Tokyo are going to have to start cozying up to Beijing and Moscow.

For further proof of this trend, reference our article “Will Japan Ever Be the Same?

The third reason these agreements are significant is that they will help goad European leaders into taking drastic action in their efforts to save the eurozone.

German Finance Minister Wolfgang Schäuble said Tuesday that this latest currency agreement between China and Japan highlights the importance of a united Europe. “Over the Christmas break, Japan and China surprised us with the news of a currency pact,” Schäuble told Germany’s rbb Inforadio. “These are developments that show it’s good that we have a unified Europe. United, Europe is the strongest economic area in the world. We have good chances to pursue our interests and then the opportunity to implement them in the world.”

As the Chinese yuan takes on a more powerful role in international trade, European leaders are hustling to present a viable reserve currency alternative to the ailing dollar. If Europe can unite into a concrete fiscal union, backed by the full economic might of Germany, the euro will become such a reserve currency alternative. Bible prophecy predicts that such a German-led economic bloc will emerge in the end time.

For further proof of this, reference our article “A New Global Financial System.”