M A Hossain,
For decades, the global financial system has been founded on a convenient assumption. The US would keep taking on more debt than it earned, and countries like Japan would cover the bill. And for decades, that seemed to work just fine, because it seemed to work for both sides. America got to borrow money at low interest rates, while Japan got to amass massive reserves of cash invested in US Treasury bonds. And in the meantime, Japan became a export-driven nation, as low interest rates fueled the growth of its companies.
That bargain is beginning to crack.
The dramatic depreciation of the Japanese yen is often portrayed as Japan's domestic problem. It is anything but. Behind the weakening currency lies a structural imbalance that could reverberate through global financial markets, exposing vulnerabilities not only in Tokyo but also in Washington. Ironically, what begins as a currency crisis in Asia could become a debt crisis in the United States. The greater danger is not merely a falling yen; it is the possibility that one of America's largest creditors may no longer be willing—or able—to finance America's expanding fiscal excess.
The Yen's Decline Is a Symptom, Not the Disease
The Japanese yen, once regarded as one of the world's safest currencies, has fallen to its weakest level against the U.S. dollar in nearly four decades, hovering around ¥160 per dollar. The reasons are well understood.
The Bank of Japan long maintained low interest rates while the U.S. Federal Reserve was aggressively raising them in order to curb price increases. The result was a huge interest-rate gap between Japan and the U.S. and other Western countries. As a result, investors were highly interested in a so-called yen carry trade, i.e. they were borrowing in yen at low interest rates and were investing the funds thus raised in dollar denominated assets with higher interest rates.
This trade became a powerful source of liquidity for global markets. But it also created relentless selling pressure on the yen.
Japan's dependence on imported energy further aggravated the situation. Higher oil and liquefied natural gas prices forced Japanese importers to exchange increasing amounts of yen for dollars, adding further downward pressure on the currency. Foreign investment into Japanese equities paradoxically reinforced the trend because many international investors hedged their currency exposure by selling the yen.
These forces combined to push the currency toward levels unseen since the mid-1980s. Yet exchange rates rarely tell the whole story. They often reveal deeper structural weaknesses beneath the surface.
America's Debt Addiction Meets Japan's Financial Dilemma
Japan remains the largest foreign holder of U.S. Treasury securities. For decades, these investments helped finance America's expanding budget deficits while keeping Treasury markets stable. That relationship now faces unprecedented strain.
Whenever Japanese authorities intervene to support the yen, they must purchase yen using foreign currencies, primarily U.S. dollars. Those dollars largely come from Japan's enormous foreign reserves, much of which are invested in U.S. Treasury bonds. Significant intervention therefore risks substantial Treasury sales.
Reports already suggest that Japan reduced its foreign securities holdings by tens of billions of dollars during recent months, fueling speculation that reserve drawdowns have begun.
Ordinarily, financial markets could absorb moderate Treasury sales. But today's circumstances are anything but ordinary.
Washington is issuing enormous volumes of new debt while simultaneously refinancing trillions of dollars in existing obligations. Federal deficits continue expanding despite historically high interest rates. According to the Congressional Budget Office, U.S. publicly held debt already exceeds 100% of GDP and is projected to climb steadily over coming decades.
If Japan transforms from a reliable buyer into a persistent seller of Treasuries, bond markets could face an uncomfortable adjustment.
Higher Treasury yields would ripple throughout the American economy. Mortgage rates would remain elevated. Corporate borrowing would become more expensive. Commercial real estate—already under pressure—could deteriorate further. Most importantly, the federal government's own interest payments would continue consuming an ever-larger share of national expenditure.
An Empire Built on Borrowing Cannot Ignore Arithmetic
The United States often presents itself as the indispensable anchor of global finance. The dollar's reserve-currency status has indeed provided extraordinary advantages. Yet reserve-currency privilege is not a substitute for fiscal discipline.
For decades, Washington has assumed that global demand for dollar-denominated assets would remain virtually limitless. That confidence encouraged persistent deficit spending regardless of which political party occupied the White House. Republicans cut taxes without proportional spending reductions. Democrats expanded public expenditure through increasingly ambitious fiscal programs. The result has been bipartisan debt accumulation on a historic scale.
America's financial strength has become increasingly dependent upon foreign creditors continuing to purchase Treasury securities.
This is where Japan's predicament becomes America's problem.
How long should the Tokyo government continue to sell Treasuries to defend the value of the yen? Eventually the Federal Reserve is likely to face even greater pressure to intervene in the bond market in order to stabilize the yields in order to forestall renewed concerns over inflation, money expansion and the credibility of the central banks.
Washington's challenge is therefore self-inflicted. Years of fiscal excess have reduced America's room for policy manoeuvre precisely when global conditions are becoming less forgiving.
A Warning for the Global Financial Order
Japan itself confronts an unenviable dilemma. Government debt exceeds 250% of GDP—the highest among advanced economies. Raising interest rates aggressively would strengthen the yen but dramatically increase debt-servicing costs. Keeping rates low preserves fiscal stability but encourages further currency depreciation. Tokyo finds itself trapped between monetary necessity and fiscal reality.
The United States faces a remarkably similar paradox. The Federal Reserve cannot keep interest rates high forever without paying more for Treasury costs and slowing down the economy. If they lower the rates soon it could start inflation again and people will not trust the money decisions.
Neither Japan nor America has a way out of this problem. Countries in Asia, Africa and the Global South should observe these developments carefully. Excessive dependence on any single reserve currency or financial centre increasingly carries systemic risks. The gradual diversification of international trade settlements, the expansion of regional financial arrangements and renewed interest in alternative payment systems all reflect growing recognition that the existing financial architecture is becoming more fragile.
The weakening yen is therefore more than a Japanese currency story. It is a warning signal about the structural imbalances underpinning the global economy.
America's greatest financial vulnerability today is not an external adversary. It is its own dependence on continuously expanding debt financed by increasingly cautious creditors.
The collapse of the yen does not guarantee an American financial crisis. Markets possess remarkable resilience, and policymakers retain significant tools to prevent disorder. But dismissing Japan's currency turmoil as a distant Asian problem would be a serious mistake.
Financial history rarely announces its turning points in advance. They emerge quietly, disguised as isolated events that appear manageable until they reveal a much larger pattern.
The next chapter of global financial instability may not begin with Wall Street. It may begin in Tokyo's foreign exchange market—and end by forcing Washington to confront a reality it has postponed for far too long: even the world's dominant superpower cannot borrow indefinitely without eventually paying the price.
M A Hossain is a senior journalist and international affairs analyst based in Bangladesh.
This article published at :
1. Asia Times, HK : 08 July, 26
No comments:
Post a Comment