Jakarta. Indonesia and Japan have agreed on a local currency settlement deal that will allow both countries to use the rupiah and the yen to settle bilateral trade and direct investment transactions. 

The agreement will allow exporters to exchange rupiah directly with the yen, rendering an intermediate currency like the US dollar redundant and thus reducing transaction costs. It will also help the exporters avoid exchange rate volatility. 

Bank Indonesia Governor Perry Warjiyo and Japanese Finance Minister Taro Aso signed the agreement in Tokyo on Thursday, the central bank said in a statement.  

"Japan's Finance Ministry and Bank Indonesia have reached a mutual agreement on an initiative to encourage local currency settlement in trade and direct investment, which includes, among other things, the use of direct exchange quotation and interbank trading between the yen and the rupiah," the bank said.

Indonesia had banned trading the rupiah overseas, drawing lessons from the Asian Financial crisis that exposed the currency to massive speculation by traders.

But the policy had dragged down export and import due to the need to settle transactions in US dollar. 

Bank Indonesia has been aware of the issue for some time and in the past few years has worked hard to loosen the policy, including striking deals on local currency settlement.

The deals typically allow transactions to be settled within each country's jurisdiction. 

Before the agreement with Japan, Bank Indonesia had also struck similar deals with Malaysia and Thailand. 

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