There is a looming threat of a $3 trillion crisis over Japan2 min read
Former head of the Bank of Japan, Haruhiko Kuroda, changed the direction of the global market when he unleashed a flow of Japanese money totaling $3.4 trillion into the investment world. Now, the new leader of the central bank, Katsuo Ueda, is likely to break this legacy and cause shockwaves in the global economy, reports Bloomberg.
Just over a week before an important leadership change at the Bank of Japan, investors are preparing for the inevitable end of a decade of ultra-low interest rates. The outflow of money from the country accelerated after Kuroda took measures to lower bond yields in 2016, culminating in offshore investments totaling more than two-thirds of Japan’s economy.
All of this could come crashing down under Ueda, who may have no choice but to put an end to the experiment with “easy money” in the face of rising interest rates in other countries, which threatens global financial stability.
The stakes are huge: Japanese investors are the largest foreign holders of U.S. government bonds, and own virtually everything from Brazilian bonds to European power plants and packages of risky American loans.
The increase in borrowing costs in Japan threatens to intensify fluctuations in global bond markets, which are being exacerbated by the U.S. Federal Reserve’s campaign to combat inflation and fears of a new credit crisis.
Against this backdrop, the Bank of Japan’s tightening monetary policy is likely to increase control over creditors in Japan following recent bank upheavals in the U.S. and Europe.
The Bank of Japan has bought Japanese government bonds worth 465 trillion yen ($3.55 trillion) since Kuroda implemented quantitative easing 10 years ago, which led to lower yields and caused unprecedented distortions in the sovereign debt market. As a result, local funds sold securities worth 206 trillion yen during this period in search of greater profits from other sources.