The jury is still out on whether the Chinese renminbi (RMB) will displace the U.S. dollar in the foreseeable future. What is clear, however, is that challenging a hegemonic currency is not simple. For the RMB to eventually reign supreme, not only would the Chinese leadership, particularly the country’s monetary authority, need the political will to prioritize the internationalization of its currency over concerns with domestic stability, it would also have to gain the support of the financial markets and other economic and political players. All that is easier said than done.
The recent history of how the Japanese yen tried and failed to become the dominant international currency provides a good illustration of the challenges. By the late 1980s, the world had started to see Japan’s economic power and its currency, the yen, as a major competitor to the U.S. economic order. But Japan was not ready to take on the role of challenger; after the Asian financial crisis (1997-98), the Japanese government made serious efforts to internationalize the yen, but its policies did not help in that regard.
Two decades later, after the Japanese fully liberalized capital account transactions, the yen is largely governed by market forces and is no longer a threat to dollar dominance. Instead, Japan is an effective supporter of dollar-dominated Asia and, given its economic size and its developed financial and monetary capacity, it continues to have great influence in East Asia’s economic order. Still, as the region’s economic integration deepens and China’s currency ambitions increase, Japan also engages in a hedging strategy meant to protect against volatility in the U.S. economy. What Japan does today and the limits of what Japan found it could do in the past tell us a lot about the dynamics of the international monetary order as a whole—and about what China can expect in the coming decades.
JAPAN IN A DOLLAR WORLD
For several decades after the end of World
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