Japanese yen initiative fails to turn heads

The dollar still dominates export transactions in Vietnam

Since 2003, the Japanese Ministry of Finance put forward a programme enabling Vietnamese exporters, with established long-term business relationships with Japanese partners and regular shipments from Vietnam to Japan, to take advantage of preferential loans sourced from a special trading fund created by the ministry.
To be eligible for these medium- and long-term loans, all transactions between Vietnamese and Japanese enterprises must be done in Japanese yen as opposed to US dollars.
These [transactions] will be monitored by Vietnamese commercial banks that are assigned by governmental financial institutions like the State Bank and the Development Assistance Fund to authorise the loans.
The ultimate aim of the Japanese effort is to gain a certain market share for the yen on the Vietnamese foreign currency market so as to challenge the dominance of the US dollar.
The US dollar accounts for up to 90 per cent of the total trading transactions in the country.
Unfortunately, the programme has not made much progress partly because the two countries are still discussing the criteria for eligible borrowing targets as well as the lending framework.
According to a representative from the Japanese International Monetary Institute (JIMI) at a meeting last week with relevant Vietnamese government bodies to review the performance of the programme, the government of Vietnam has set too many policies in favour of the US dollar rather than other hard currencies.
For example, the Vietnamese government encourages exports to be conducted in US dollar earnings as all Vietnamese export products’ prices are listed in US dollars and the greenback is accepted in all transactions and assets.
Currently, the greenback accounts for as much as 90 per cent of the country’s foreign currency basket with the rest divided amongst other hard currencies including the euro and Japanese yen.
On one hand, this expert agreed that such dollar-favoured policies were totally understandable given that the greenback has long been recognised as the international trading currency of choice.
On the other hand, he pointed out such a heavy reliance on the buck contained a high risk exposure that might easily lead to a widespread financial crisis for the country if the US dollar were to run into difficulties.
JIMI argues one of the main reasons behind the Asian financial crisis 1997-1998 was that the majority of short-terms loans that Asian countries borrowed from abroad were in US dollars, likewise trading transactions. The reliance on only one currency led to a mass collapse of regional forex markets.
“Diversifying Vietnam’s forex market to other strong currencies such as the yen or the euro is much encouraged should Vietnam wish to obtain a healthy financial system and stay firm from a possible regional crisis [in case of], not to mention that the fund is a necessary source to inject capital for capital-needed exporters,” said a representative from the JIMI.
Japanese experts added with a higher amount of the yen in the country’s foreign currency reserve, it would also be easier for the Vietnamese government to manage the total debt in the yen that it currently owes to Japan.
Since 1990, the Japanese government has made a total of JPY832 billion of official developing assistance (ODA) available to Vietnam with outstanding loans to date standing at JPY339 billion.
Vietnamese officials, however, have their own views. The State Bank pointed out that local financial infrastructure was still under-equipped to meet the demand of extending transactions in Japanese yen, although in principal the bank agreed that diversifying the foreign exchange market was necessary for Vietnam.
The necessary financial tools are still unavailable at local commercial banks to help enterprises hedge against the foreign exchange risks of the yen as those of the dollar, such as futures, forwards, swaps or options.
A state-owned commercial bank cited even though they have introduced futures contract for the yen [a tool to help firms hedge against the risk of the exchange rate fluctuation of VND/JPY in the future], there are doubts that firms are capable of using this tool.
Whether the Japanese currency can eventually expand its presence in Vietnam remains open to debate.
However, in the context that the dollar continues dropping against other hard currencies – like the euro or the yen over the last few months – diversifying the foreign exchange market is one of the sound measures Vietnam should do to protect its local economy.