The yen may face a test of confidence as Tokyo aims to boost the currency’s presence abroad at a time when China has been eclipsing Japan’s clout on the world stage.

Japan’s gradual economic recovery and deeper ties with the rest of Asia could add some impetus, but there are still challenges for the yen to improve its status as a settlement and reserve currency.

In the past decade, China has taken steps to internationalize its own currency, the yuan.

The European Central Bank has shifted some of its foreign exchange reserves from the U.S. dollar to the yuan, a development some currency analysts view as giving a nod to the Chinese currency’s increased role.

“What we’ve seen is increased demand for the Chinese renminbi instead of the yen, which is a natural turn of events because China’s economic power is getting stronger,” said Toru Nishihama, chief economist at the Dai-ichi Life Research Institute, referring to China’s currency by its official name.

“It all comes down to whether Japan’s economy can fully recover. Without recovery, it’s hard to expect yen demand to increase,” Nishihama added.

As part of a broader vision to bolster ties with other Asian countries, the government is hoping to promote greater use of the yen by its Asian counterparts, a process that would reduce dependence on the U.S. dollar.

The Finance Ministry envisages a market where the yen and the Thai baht will be exchanged directly.

“We’re trying to enhance the usefulness of the yen and other Asian currencies,” a ministry official said, stressing the importance of trade and investment in Asia.

In global trade, the U.S. dollar plays a key role as a settlement currency. Still, the ministry sees potential demand for direct exchanges of the yen and the baht, given that nearly 50 percent of trade between Japan and Thailand is settled in either of the two units.

Many Japanese companies do business in Thailand, with the number of member firms exceeding 1,700 in 2017, according to data by the Japanese Chamber of Commerce in Bangkok.

Robust exports to Asia have continued to give a boost to the world’s third-largest economy in recent quarters.

The economy has been in an expansionary phase since December 2012, a Cabinet Office panel has said, the third-longest run after a 57-month period between 1965 and 1970.

For currencies other than the baht, however, some analysts say the likelihood of growing demand is an open question. They cite uncertainty over the future of the Association of Southeast Asian Nations, a regional bloc consisting of countries with varying growth potential.

There appears to be a long way to go for the yen to enhance its reserve currency status.

According to International Monetary Fund data, the U.S. dollar remained the most favored currency, comprising nearly 64 percent of the world’s total foreign exchange reserves at the end of 2016.

The yen, meanwhile, accounted for over 4 percent ahead of the yuan’s 1 percent.

As interest rates remain low and the economy is far from high growth, the yen’s relatively small share in foreign exchange reserves is inevitable, said Masafumi Yamamoto, chief currency strategist at Mizuho Securities Co.

Yamamoto said removing obstacles to the yen’s use in transactions is a plus for companies. But when it comes to a currency’s internationalization, there are both pros and cons that need to be weighed.

“The more a country’s currency is held and used beyond its borders, the higher its volatility will become,” Yamamoto added.

Over the longer term, Japan has its work cut out to make the yen — largely viewed as a safe choice in times of market uncertainty — more appealing amid the rapid graying of its society and an urgent need to fix tattered finances.

The IMF recently called for Japan to promote “accelerated structural reform and a credible medium-term fiscal consolidation plan” to support growth.

China, for its part, may solidify its economic standing in the region, but analysts say it still has a slew of reforms to undertake, including in the financial sector.

“Is the yen an easy-to-use currency? Do foreign investors want to hold yen-denominated assets?” said Dai-ichi Life’s Nishihama. “I have both hopes and doubts over the yen’s increased use.”

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