JAPAN'S Ministry of Finance remains extremely cautious about the greater use of the yen as a regional trading or reserve currency, despite claims by the Economic Planning Agency that internationalisation of the yen is gathering pace. In a white paper on the world economy issued late last week the agency pointed out that the weighting given to the yen in exchange rate baskets used to fix the values of Asian currencies increased in the first half of this year, when the US dollar fell sharply against the yen. Senior officials at the ministry did not deny that, but said they were in no hurry to see the creation of a yen bloc that would end the dollar's role as the main reserve currency in the region. The ministry also said other Asian countries were less anxious to make the switch than was sometimes suggested. 'The question of what currency to use in international trade is like a beauty contest - in other words it's not up to us to decide,' Takatoshi Kato, vice-minister for international financial affairs, said. Mr Kato said that while the ministry expected to liberalise Tokyo's capital markets so as to make it easier to hold the yen as a reserve currency, it would not welcome a rapid switch into yen by Asian central banks. Observers said the ministry had been slow to take measures that would make it easier for Asian central banks to hold yen. In particular the ministry seemed in no hurry to increase the issue of short-term treasury bills. Central banks prefer short-term bills over long-term government bonds because of their increased flexibility. But only 12.8 trillion yen (about HK$974.39 billion) worth of short-term government bills had been floated as of late August, from a total of 210 trillion yen worth of government bonds. By contrast the Bank of Japan is said to be more positive about greater internationalisation of the yen and liberalisation and diversification of the Tokyo capital market. Despite Japan's ambivalence the yen is clearly gaining ground in Asia. About 49 per cent of Japan's exports to the region are estimated to be yen denominated against 19 per cent of exports to the US and 37 per cent of exports to Europe. About 22 per cent of the reserves held by Asian central banks are believed to be held in yen as against 8-9 per cent for the world as a whole. Analysts in Tokyo said Asian governments faced a number of pressing reasons for strengthening ties to the yen. For recipients of Japanese foreign aid, higher yen reserves are needed to balance increased costs of repaying yen loans when the dollar depreciates. A senior Indonesian diplomat in Tokyo estimates that the servicing costs of Indonesia's yen debt increase by US$200 million a year if the yen appreciates by one yen against the dollar. Indonesia began to include the yen in its foreign reserves three years ago and the yen now ranked second to the dollar in the government's foreign currency holdings, he said. Non-debtor Asian economies like Singapore and Taiwan tended to manage their reserves in much the same way as private institutional investors, Dr C. H. Kwan, senior economist for Nomura Research Institute in Tokyo, said. In the early part of 1995 both governments almost certainly increased the yen share of their reserves when the yen started rising against the dollar. Economies that tie their currencies to the dollar (like Hong Kong) suffer from imported inflation when the dollar depreciates, adding an incentive to increase yen reserves. Kenneth Courtis, chief economist and strategist for DB Capital Markets (Asia), saidbig Japanese companies preferred to invest in countries that had dollar-linked currencies, because that made it easier for them to export locally manufactured products back to Japan. 'Corporate Japan won't lead the charge to a yen-based economy,' Mr Courtis said. But he believed that the 'privileges of owning a regional reserve currency will ultimately outweigh the drawbacks'.