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In 2015, Clyde Prestowitz’s book Japan Restored imagined a Japanese century emerging from upheavals such as an Israeli attack on Iran. While conflict now grips the Middle East, there are few indications of the revolutionary change the former US national security official foresaw. But in one crucial respect this already is a Japanese century – thanks to the yen’s role as easy money for global finance.
The Bank of Japan’s loose monetary policy has turned the yen into the world’s cheapest and most reliable funding currency. By suppressing yields on public debt to keep Japan’s domestic economy afloat, the BoJ effectively created a publicly subsidised funding pipeline for bankers. They can make a quick buck by borrowing cheaply in yen and investing in higher-return assets, such as US equities. The “yen carry trade” surged after the pandemic, with speculators betting $435bn in the two years to 2024 out of the estimated $1.7tn worth of yen supplied. The profits for global investors are reckoned to run into tens of billions of dollars.
Japan’s first rate hike since 2007 came in March 2024 – but even that shift barely dented the carry trade’s popularity. There is a persistent fear that the BoJ may decide to catch the market unaware and aggressively raise rates. That would risk a global financial shock for two reasons. First, the profit made from the “spread” between Japanese and US assets would shrink. Second, a stronger yen would mean borrowers need more dollars to repay yen-denominated debts. Add to this that hedge funds involved are heavily leveraged, and it is little wonder that even a hint of policy change unsettles markets.
Yet Japan’s strength is also its weakness. It has created an external dependency – in the form of the carry trade – to manage internal crises rooted in its own success. Such was Japan’s rise that its western partners convinced Tokyo to substantially revalue the yen in 1985. The authorities overcompensated for the yen’s strength with loose credit – which led to soaring asset prices. The land under the emperor’s palace, less than a square mile in Tokyo, was estimated at its peak to be worth about the same as all the land in California. The bubble burst in 1992.
The long slump that came next forced policy to become more and more radical. That’s unlikely to change under Japan’s new prime minister, Sanae Takaichi, a “reflationist” rightly committed to fiscal expansion. Tokyo has since spent more than three decades stabilising a private sector unwilling to borrow. Stability made its currency the cheapest cash in global finance. But stability is not growth.
The work of the economist Luiz Carlos Bresser‑Pereira helps explain why. He argues that a country’s success depends on managing five macroeconomic prices: profit, the exchange rate, interest, wages and inflation. Apply that framework to the world’s fifth-largest economy and its constraints come into focus. While Japan has recently seen real wage growth, wages historically have been either flat or falling. There has been no transformation in its wage-setting regime. Without a reliably competitive exchange rate and a viable profit rate, Japan’s firms cannot confidently access demand. Without demand, reform goes nowhere. Japan has fixed some of its problems. Its century has arrived – but as a financial condition, not a productive one.
