foreign-policy-diplomacy
Japan and India Take Steps Toward Currency Cooperation
Analysis
In a significant development for bilateral financial cooperation, Japan and India have renewed their Bilateral Swap Arrangement (BSA), maintaining the facility at $75 billion . While the BSA itself continues to operate through the US dollar—allowing both authorities to swap their local currencies in exchange for the greenback—recent reports indicate that the two governments are exploring a more ambitious objective: direct yen-rupee transactions that would bypass the US dollar entirely .
The Bilateral Swap Arrangement: Context and Continuity
The BSA, renewed effective 28 February 2026, represents the third amendment and restatement of an agreement first established between the Bank of Japan and the Reserve Bank of India . The facility size remains unchanged at $75 billion, signalling both countries' commitment to maintaining robust financial safety nets .
According to official statements from Japan's Ministry of Finance and the Reserve Bank of India, the arrangement aims to strengthen and complement existing financial safety nets, deepen financial cooperation, and contribute to regional and global financial stability . As a two-way currency swap framework, it provides both authorities with a mechanism to exchange their local currencies in exchange for US dollars .
Beyond the Swap: Direct Currency Settlement
While the BSA renewal itself does not represent a departure from dollar-based settlement, reports suggest a more significant initiative is under consideration. According to Japanese media reports, both governments are examining the introduction of direct yen-rupee transactions, a mechanism that would allow businesses to settle trade in local currencies without intermediation through the US dollar .
This initiative is expected to feature in the joint statement following the summit meeting between Japanese Prime Minister Sanae Takaichi and Indian Prime Minister Narendra Modi, scheduled for early July in New Delhi . The proposed currency linkage would mark the first time such financial cooperation is formally mentioned in a bilateral summit communiqué .
Strategic and Economic Implications
For Japanese and Indian businesses, direct currency settlement would reduce transaction costs associated with foreign exchange conversion and eliminate the exchange rate risk inherent in dollar-based trade settlements. The move aligns with broader efforts by both countries—and indeed other Asian economies—to reduce their reliance on the US dollar in bilateral trade.
According to currency market analysis, the yen is expected to appreciate to approximately 146 yen per US dollar by the end of 2026, driven by the narrowing Japan-US real interest rate differential and slower risk-on sentiment . The yen is also anticipated to appreciate slightly in 2026 as the Bank of Japan continues to normalise its monetary policy . These trends may create a more favourable environment for direct yen-rupee settlements.
A Regional and Global Context
The yen-rupee initiative should be understood within the broader context of financial de-dollarisation efforts across Asia. Japan and India have each pursued similar arrangements with other partners—Japan maintains swap facilities with ASEAN countries and South Korea, while India has explored local-currency trade mechanisms with partners including Russia and the UAE.
The renewed BSA was signed by the Bank of Japan, acting as agent for the Minister of Finance of Japan, and the Reserve Bank of India . Both central banks have expressed confidence that the arrangement will contribute to financial stability beyond their bilateral relationship, potentially offering a template for deeper monetary cooperation in the region .
Outlook
While the BSA renewal confirms continued financial cooperation, the potential move toward direct yen-rupee settlements represents a qualitative shift in Japan-India economic relations. Should the initiative materialise, it could significantly reduce the dollar's role in bilateral commerce, lower business costs, and strengthen the resilience of the two economies to external currency shocks.
The July summit is expected to provide further clarity on the timeline and technical framework for implementing direct yen-rupee transactions. As with any such financial innovation, challenges remain—including establishing appropriate exchange rate mechanisms, ensuring liquidity, and coordinating central bank policies. However, the political will appears to be aligning, suggesting that yen-rupee settlement may soon move from discussion to implementation.