HONG KONG - Chinese and Japanese efforts to bypass the dollar by directly exchanging yen and yuan will improve financial stability in Asia, Kiyohiko Nishimura, a deputy governor of Japan's central bank, said on Wednesday.

Financial institutions can reduce settlement risks if the dollar is not needed as an intermediary currency, Nishimura said in a speech posted on the Bank of Japan's website.

"As such, the development of financial and foreign-exchange markets denominated in yen and yuan is an important issue for financial stability, not only for Japan and China but also for the rest of Asia," Nishimura said.