Under the scheme, the Bank of Japan and the Hong Kong Monetary Authority will facilitate real-time settlement between Japanese government bonds (JGBs) and Hong Kong dollars.
It will allow Japanese financial institutions to procure Hong Kong dollars with JGBs as collateral through the central bank network. The system will also give Hong Kong financial institutions a platform to invest short-term excess funds.
Currently, most Japanese banks operating in Hong Kong procure funds by exchanging the yen for US dollars, and then use the US currency to purchase Hong Kong dollars.
Once the new system kicks in, the Japanese banks will be able to procure Hong Kong dollars without having to pay the cost of exchanging yen for the greenback.
The move comes in the wake of increasing presence by Japanese banks in Asia, as they seek lending opportunities outside Japan amid a dwindling domestic market.
The two central banks will begin work on the new system this fiscal year that began April 1, and aim to complete it by spring of 2021.
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