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Japan and the end of the "cheap yen" era

Seyf Allah Hussein Al-Rawashdeh

3 min read

This policy was not directed solely at the Japanese domestic market; it also targeted many investors who were accustomed to borrowing in yen at a low cost, then converting these funds into US dollars and investing them in bonds, stock markets, and other assets that yield higher returns. Over time, cheap Japanese money became an important part of the flow of capital in global markets.

However, with the recent rise in interest rates in Japan, yields on government bonds have increased, and the traditional Japanese equation has begun to change. Keeping money inside Japan has become more attractive and beneficial, and here we have begun to hear some ask: Why would a Japanese investor take their money abroad if they can get a better return in their own country?

This rise in interest rates also means that the value of old bonds purchased at low interest rate levels will decline. This could put Japanese banks and insurance companies in front of a significant loss if they are forced to sell these bonds. Likewise, some Japanese institutions seeking liquidity may be forced to sell some of their investments abroad, including US Treasury bonds, or some investors may be forced to sell their investments as a result of the rise in the value of the "yen," which means an increase in the cost of borrowing from Japan to invest outside it. Thus, financial markets will export the crisis to global markets, making the change in the price of Japanese money a huge internal problem with global repercussions.

The August 2024 turmoil showed how a sharp change in the "yen" quickly extends to global stock markets, meaning that Japan today stands before a delicate equation; it wants to raise interest rates and strengthen its currency to redirect the flow of funds into its own economy, but at the same time, it does not want this to lead to widespread global financial instability.

It is worth noting that if the Japanese funds that have moved for decades in global markets and helped finance governments and companies and raise the prices of many assets are redirected to the local market, the world will not just face a change in the price of the yen, but may face a broad redistribution of global capital, which may raise the cost of borrowing in other countries, change the movement of funds between markets, and may lead to a decline in investor appetite for some assets, leaving countries and companies facing a new reality in which money that was cheap and easily accessible becomes more expensive and less abundant.

In conclusion, what is happening in Tokyo today may, in essence, be one of the chapters of reshaping the global economy tomorrow. Will Japan end the era of cheap money quietly, or will the return of its funds to the interior be the announcement of a moment of labor for the birth of a new economic system?

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