The move, which will scrap the greenback as an intermediary unit, comes as China introduces measures as part of a long-term goal of internationalizing its currency to rival the dollar.
The two-way trade will also be allowed to move in a wider range than the narrow band at which the dollar and yuan change hands, Dow Jones Newswires and the Nikkei business daily reported.
China will set a daily rate based on dealer quotes with trade allowed to move within a 3% band above or below that rate, the reports said, compared with a 1% band fixed to yuan-dollar trading.
The Chinese central bank earlier Tuesday introduced a rate of 7.9480 yuan for every 100 yen, Dow Jones said.
However, there will be no fixed rates in Tokyo trade with the currencies trading freely, according to the same media reports which provided no further details.
The yen does trade freely against other major currencies on global foreign-exchange markets, including the greenback, with the dollar buying 79.50 yen in Asian afternoon trade on Tuesday.
“From June 1, the yen-yuan exchange rate will be constantly indicated in both markets, facilitating full-fledged direct exchange trading,” Finance Minister Jun Azumi told a regular press briefing.
By not using the dollar as an intermediate currency “we can lower transaction costs and reduce settlement risks at financial institutions as well as making both nations’ currencies more useful”, he added.
The announcement comes as China introduces measures as part of a long-term goal of internationalizing the yuan to rival the dollar as the world’s benchmark currency.
Beijing’s tightly managed currency policy has triggered huge trade deficits in the United States, which accuses China of artificially undervaluing the yuan to boost exports, and has been a long-running source of friction between the world’s two largest economies.
On Tuesday, Beijing described yuan-yen trade as an “important step” in “strengthening cooperation between China and Japan in developing financial markets and mutually promoting direct trading between the two currencies based on market principle.”
China overtook Japan to become the world’s second-largest economy in 2010, and the neighbors are forging closer business ties despite frequent diplomatic spats over territorial claims and lingering historical animosities.
China is Japan’s largest trading partner, but about 60% of their mutual trade is denominated in U.S. dollars.
In March, Japan said it had won approval from Beijing to buy Chinese government bonds for the first time—Beijing does not allow investors to freely purchase its debt, requiring official approval instead.
Tokyo said it got the green light to buy Chinese government bond issues worth about 65 billion yuan ($10.25 billion), a relatively small amount that was seen as largely symbolic.
The economic powerhouses have also agreed to promote the use of their currencies in bilateral transactions—such as yuan-denominated foreign direct investment by Japanese companies in China—to reduce foreign exchange risks.
The yen, meanwhile, hit historic highs against the dollar last year, denting exporters whose products become less competitive overseas when the currency strengthens.
Japanese finance officials have vowed to step into foreign-exchange markets again to tame the value of the unit, which is increasingly seen as a safe-haven currency as the euro takes a hit owing to worries about the debt-hit eurozone.