Tokyo: Japan and China will promote direct trading of the yen and yuan without using dollars and will encourage the development of a market for the exchange, to cut costs for companies, the Japanese government said.

In sync: Japanese Prime Minister Yoshihiko Noda (right) and Chinese Premier Wen Jiabao to inspect a guard of honour during a welcoming ceremony at the Great Hall of the People in Beijing on Sunday. Photo: Andy Wong/AP

The deals between the world’s second and third largest economies come as the two-year-old European debt crisis keeps global financial markets volatile.

“Japan will start to buy a small amount of China’s bonds," a Japanese government official said on condition of anonymity because of the ministry’s policy, without elaborating on when and how much of the debt the nation plans to purchase.

“Given the huge size of the trade volume between Asia’s two biggest economies, this agreement is much more significant than any other pacts China has signed with other nations," said Ren Xianfang, a Beijing-based economist with IHS Global Insight Ltd.

Finance minister Jun Azumi said on 20 December that buying of Chinese bonds would be beneficial for Japan because it would help reveal more information about the financial markets in China, the world’s largest holder of foreign currency reserves.

Encouraging direct yen- yuan trades will aim to reduce currency risks and trading costs, Japan’s government said.

Currently, about 60% of trade transactions between the two nations are settled in dollars, according to Japan’s finance ministry. China is Japan’s biggest trading partner.

Then finance minister Noda in September 2010 said Japan should be able to invest in China’s market given that China buys Japanese debt. Japan holds $1.3 trillion of foreign currency reserves, the world’s second largest.

Austria has already been granted the eligibility to buy Chinese bonds, according to the Japanese government official. Central banks from Thailand to Nigeria plan to start buying yuan assets as slowing global growth has capped interest rates in the US and Europe. Investing in Chinese debt has become easier for central banks as issuance of yuan-denominated bonds in Hong Kong more than tripled to 112 billion yuan ($18 billion) this year and institutions were granted quotas to invest onshore.

China sold the second biggest net amount of Japanese debt on record in October as the yen headed for a post-war high against the dollar and benchmark yields approached their lowest levels in a year. It cut Japanese debt by 853 billion yen, Japan’s ministry of finance said on 8 December.

Separately, the Japan Bank for International Cooperation, JGC Corp, Mizuho Corporate Bank Ltd, the Export-Import Bank of China and other Chinese companies will establish a $154 million fund to invest in environment-related businesses such as recycling and energy, the Japanese government said.