The role of the Japanese yen as an international currency is assessed. It is found that the determinants of international-currency use imply some increase for the yen’s use in international finance; however, the implications for the yen’s use in international trade are mixed. It is also shown that, despite Japan’s emergence as the world’s largest net creditor nation, Japan’s capital outflows have not significantly facilitated the yen’s internationalization. Data are presented showing that, although the yen’s use as an international currency has increased, it is still rather modest. Wider use of the yen as a regional currency in Asia has occurred, though a “yen-zone” does not appear to be emerging.

A tripolar international monetary system-centered on the U.S. dollar, the deutsche mark, and the yen - appears to be emerging. This paper not only assesses the role of the yen as an international currency but also presents a unified theory of international currency use and distinguishes between the roles of a nation as a world banker and as an international financial intermediary.

The role of the yen in the International financial system is reconsidered from a comparative (historical) approach. Compared with the D-Mark in the postwar years, the limited use of the yen results not so much from regulations on capital movements as from the structure and behavior of Japanese economy. The history of the pound-sterling and the U.S. dollar reveals the fact that such factors as the network of foreign trade and economic size constitute the basis and “inertia” of a key-currency. Thus for a currency to rise to a key-position in global transactions, real factors are more decisive than financial market arrangement. Seen from the foreign economic relations, it is not possible for Japan to own a key-currency independent from the U.S. dollar.

The role of the Japanese yen as an international currency is assessed. It is found that the determinants of international-currency use imply some increase for the yen`s use in international finance; however, the implications for the yen`s use in international trade are mixed. It is also shown that, despite Japan`s emergence as the world`s largest net creditor nation, Japan`s capital outflows have not significantly facilitated the yen`s internationalization. Data are presented showing that, although the yen`s use as an international currency has increased, it is still rather modest. Wider use of the yen as a regional currency in Asia has occurred, though a quot;yen-zonequot; does not appear to be emerging.

During risk-off episodes, the yen is a safe haven currency and on average appreciates against the U.S. dollar. We investigate the proximate causes of yen risk-off appreciations. We find that neither capital inflows nor expectations of the future monetary policy stance can explain the yen’s safe haven behavior. In contrast, we find evidence that changes in market participants’ risk perceptions trigger derivatives trading, which in turn lead to changes in the spot exchange rate without capital flows. Specifically, we find that risk-off episodes coincide with forward hedging and reduced net short positions or a buildup of net long positions in yen. These empirical findings suggest that offshore and complex financial transactions should be part of spillover analyses and that the effectiveness of capital flow management measures or monetary policy coordination to address excessive exchange rate volatility might be limited in certain cases.

In this important new book, C.H. Kwan asks whether the Japanese yen can, or will, replace the dollar as the key currency in East Asia. Kwan analyzes the implications for Japan and Asia's developing countries should they come together to form a yen bloc—a grouping of countries that use the yen as an international currency and maintain stable exchange rates against the yen. Combining academic analysis with his experience advising the Japanese prime minister and the Japanese minister of finance, Kwan concludes that a yen bloc might benefit Asia's developing countries—as well as Japan—while contributing to a more stable international monetary order. Kwan's book represents the first attempt to explore systematically the possibility of monetary integration in Asia. It also provides a vision for regional integration in Asia in the twenty-first century.