Japan and China began direct yen-yuan trading on June 1. During Japanese Prime Minister Yoshihiko Noda's visit to China in December 2011, the two governments signed a number of financial cooperation agreements, one of which was to allow the direct trading of the yuan against the yen. This has multiple implications for bilateral trade and financial cooperation.

First of all, it can help avoid potential losses caused by exchange rate fluctuations. Previously, because the yuan is unconvertible in the capital account, trade between China and Japan was mainly settled in US dollars, with a small part settled in yen. Conducting transactions without using a third country's currency will help reduce transaction costs and lower the risks involved in settlements.

China's enterprises have an edge in low-price competition in foreign trade but have little experience in dealing with exchange rate fluctuations. Their slim margins usually are offset by exchange rate risks.

Now export-oriented Chinese enterprises can mark the price and settle accounts in yuan with decreasing exchange rate risk, which will advance their performance. In 2011, China's exports to Japan reached $148.3 billion, and China's enterprises suffered a total loss of about $1.5 billion even if we estimate the losses at the lowest level of 1 percent. If China's exports are priced and settled in yuan and Japanese companies implement yen-denominated settlement, it will clearly benefit Chinese enterprises a lot.

Second, direct yuan-yen trading can save Japan a handing charge of $3 billion in its trade account every year. And there will be no capital account commission payable to the United States.

Third, China and Japan are the world's second and third largest economies, direct yuan-yen trading between the two countries will attract their smaller trade partners to use the yuan and yen, especially in East Asia. Expanding the use of the two currencies will be conducive to Chinese and Japanese enterprises participating in East Asian economic cooperation and will help promote trade.

Fourth, both China and Japan are G20 members, and both advocate reform of the International Monetary Fund, they want the organization to play a more important role in international financial regulation, and want the yuan and the yen to have a greater international influence. The direct trading of the two currencies will support this.

In fact developing closer financial cooperation between the two countries is of special significance to Japan.

Japan is in sore need of China's support. According to the Japanese government balance sheet published on May 28, at the end of 2010, Japan's national debt was 400 trillion yen ($5.12 trillion) more than its assets.

On May 23, 2012, Fitch downgraded Japan's sovereign debt rating to a negative outlook. On May 20, Japan again announced a big trade deficit, and its status as a big trading and exporting country has been shaken. Japan's international competitiveness is in gradual decline. Though a fiscal crisis has yet not broken out in Japan, it is at a critical point when any carelessness might result in a full-blown crisis.

In this context, China's courage in carrying out financial cooperation with Japan is equivalent to providing an international credit guarantee for Japan. By agreeing to yuan-yen direct trading and increasing its holdings of Japanese government bonds, China's activities will help many customers feel confident in returning to the Japanese market.

Although Japan has strengthened its ties with the US and provided important assistance to the Philippines, Vietnam, India and other countries in the region in diplomatic and security fields, in a bid to ring-fence China, it has to consider its own economic prospects.

With this in mind, Japan has promoted bilateral cooperation with China and has agreed to begin negotiations on a free trade area with China and the Republic of Korea and research into an East Asian 10 +6 free trade area.

In short, the international community and the world economy have entered into an era of great adjustment, with shifting alliances and fierce competition between powers. China and Japan can continue to cooperate and make positive contributions to world peace and development.