As China's yuan takes the first steps toward becoming a global reserve currency, Japan offers a lesson on how hard it is to rival the dollar's supremacy.
The Japanese yen's share of global reserves reached a record 8.5 percent in 1991 as the nation's post-War industrial boom made its economy the world's second-largest. But its economic decline soon resulted in its clout shrinking as the euro gained ground and the greenback re-asserted its dominance. While the yen is still ranked third for trading and fourth for payments, it now accounts for just 4 percent of world reserves, compared with the dollar's 64 percent and the yuan's 1 percent.
The yen's failure to dent the U.S. currency's primacy illustrates the precarious mix of policy, political will, and prosperity needed for the yuan to come even close to dislodging the dollar. Like China, Japan struggled with the degree of openness needed to promote global use of its currency. By the time its markets became more accessible to foreigners, the bursting of its asset bubbles and consequent "lost decade" -- coinciding with China's dizzying rise -- relegated the yen to its also-ran status as a reserve currency.
"The main lesson is that it is impossible to have a major reserve currency like the dollar or euro unless you are willing to sustain a high degree of financial market openness over a very long period of time," said Arthur Kroeber, the Beijing-based founding partner and managing director at Gavekal Dragonomics, a research firm. ...
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