In mid-June, Indonesian Finance Minister Purbaya Yudhi Sadewa spent two days in Beijing and flew home more than satisfied.
China’s finance ministry and the People’s Bank of China pledged it fast approval of Indonesia’s debut panda bond, a renminbi-denominated issue targeting about $1 billion. The Asian Infrastructure Investment Bank (AIIB) added a commitment of 17 billion dollars for development projects until 2029, along with plans to open an office in Jakarta.
For a government looking to finance its budget without relying so heavily on the dollar, it was a productive trip. Six decades ago, Indonesian delegations made similar trips, but the destination then was Tokyo, not Beijing.
That previous relationship was never an accident of geography. Historical research on Japan’s aid program, most recently by Yukiko Kuramoto from Rikkyo Universityshows that Tokyo’s official development aid rested on five deliberate principles.
The fifth was clearly stated: the long-term goal of an Asian economic bloc. In pursuit, Japan lent exclusively in yen, reasoning that the wide circulation of its currency throughout Asia would guarantee its leadership in the region.
Indonesia was at the center of that design. Between 1965 and 1990, it was the largest recipient of Japanese aid, absorbing some $74 billion, with nearly half of the loan money channeled into power plants, telecommunications and transport.
Thousands of Indonesian officials were trained in Japan. The Asian Development Bank (ADB) gave the deal an institutional home; Its presidency has been held by a Japanese national since the bank’s founding, although Tokyo was careful never to advertise this fact.
Whether all this would solidify into a real currency block remained an open question. In 2009, International Monetary Fund (IMF) economist Kazuko Shirono put it bluntly in a working paper titled “Block Yen or Block Yuan.”
Its trade-based assessments pointed to an uncomfortable conclusion for Tokyo: a common yuan-pegged currency arrangement would bring greater welfare benefits to East Asia, since China had already displaced Japan as the center of regional trade. It was a bold call for its time. The years since have proven him right.
Consider where the three currencies stand today. The yen has fallen beyond 162 per dollar the weakest level since 1986and Japan’s real effective exchange rate has fallen to its lowest level in more than 50 years. The finance ministry is believed to have spent some 5.5 trillion yen (US$34 billion) protecting the currency at the end of April, and traders suspect it has returned to the market since then.
The pressure is structural and not speculative. With the US Federal Reserve keeping rates at 3.50% to 3.75% against the Bank of Japan’s 1%, the exchange trade continues to pay and yen sellers continue to return.
China’s yuan tells the opposite story. It has been among the most stable currencies in Asia during the turmoil of the past year, and its share of global reserves continues to rise, with regional trade increasingly based on it. The Indonesian rupiah sits between the two, soft against the dollar at around 17,900 but significantly stronger against the yen.
This last detail carries more weight than it seems. Indonesia’s legacy yen debts, including long-term repayment obligations on the Jakarta MRT, have become easier to service. The new borrowing that Jakarta is considering, meanwhile, is expected to cost a coupon of just 2.3% to 2.5%far below what it would cost to issue the dollar.
The mechanics of panda bonding also deserve a closer look. Under the local currency transaction framework agreed between the two central banks, Chinese investors pay in yuan while the Indonesian government receives rupiah, with not a dollar in between.
Twenty-one institutional investors, among them China Investment Corporation and the Export-Import Bank of China, have signaled interest. The request went so far ahead of the documents that the release slipped to the end of July at the request of the investors themselves.
The echo of the 1970s is hard to miss. Then a rising Asian power lent its currency to Jakarta, embedded its advisers in Indonesia’s planning apparatus and built a multilateral bank to anchor the region. Another power is now moving down the same path, with the AIIB stepping into the role that the ADB once played.
However, three qualifications should dampen any talk of an immediate changing of the guard.
First, the dollar remains the center around which everything else revolves. The yen is not falling as much against the yuan as both are being measured against a dollar supported by high US rates. Any yuan-centric deal that emerges in Asia will grow within the dollar system, not instead of it.
Second, Jakarta is not choosing sides. Purbaya has characterized the panda tie as diversification, invoking a principle of non-commitment and stressing that Indonesia remains open to capital from the United States, Europe and Singapore alike. A country that spent decades borrowing in the yen understands the dangers of relying on any single currency, regardless of the flag it flies.
Third, Japan’s heritage has not disappeared. As Kuramoto notes, ideas carried over from decades of yen borrowing were embedded in Indonesian state institutions, from long-term planning to the technocratic corps that still directs economic policy. What has weakened is not the relationship – it is the currency at its center.
And that is the real lesson of this moment. Coin blocks are not built with ambition alone; they are built from stability. Postwar Japanese planners understood this well, which is why they likened their lending to institutions built to last.
The yen anchored Asian borrowing for as long as it was a currency worth holding. At 162 to the dollar, with intervention now a recurring item, that condition no longer holds and no diplomacy can replace it.
Shirono concluded her 2009 paper with the question still open. Seventeen years later, the market is responding to one bond issue at a time. For Tokyo, the window has not closed; a stabilized yen and a credible policy path may yet restore its appeal.
But monetary anchors are chosen, not inherited. Asia, ever practical, is quietly choosing again.
Irvan Maulana is an independent policy analyst based in Jakarta.
