The Tokyo Moment: Japan's Resurgence and its Global Impact
For decades, Japan has been perceived as a calm and quiet nation, seemingly content to remain in the background of global affairs. However, a new term, "Tokyo Moment," is emerging in financial media, signaling a significant shift in Japan's role in the global financial market. How did a nation seemingly stuck in a 30-year period of economic stagnation suddenly master the pulse of the global economy?
From Economic Giant to Power-Saving Mode
In the 1980s, Japan was an economic powerhouse, its industries dominating global markets. Japanese cars, power plants, and semiconductors flooded the world, causing concern among Western businesses. The U.S. trade deficit soared, and there was even talk of Japan buying up the entire United States. Land prices in Tokyo's Ginza district exceeded those in Manhattan, reflecting the immense confidence of the time.
The Plaza Accord and the Bubble Economy
In 1985, the United States orchestrated the Plaza Accord, an agreement among major economies to depreciate the U.S. dollar. While ostensibly aimed at addressing trade imbalances, it primarily targeted Japan, forcing the appreciation of the Japanese yen. This sudden surge in the yen's value made Japanese exports more expensive, threatening the country's export-driven economy.
To counter this, the Japanese central bank implemented a policy of low interest rates. This, combined with the yen's inflated value, fueled an unprecedented asset bubble. Excess capital flooded into the stock and housing markets, leading to rampant speculation and unsustainable growth. The Nikkei stock index soared, and real estate prices skyrocketed.
The Bursting Bubble and the Lost Decades
In the late 1980s, the Japanese central bank attempted to rein in the overheated economy by raising interest rates. This triggered the collapse of the asset bubble in the early 1990s. The Tokyo stock market crashed, and real estate prices plummeted, leaving many individuals and companies saddled with massive debt.
This marked the beginning of Japan's "lost decades," characterized by economic stagnation, deflation, and a risk-averse culture. Companies became "zombies," kept alive by banks unwilling to absorb the losses from their bankruptcies. A generation witnessed the destruction of wealth, leading to a shift in values towards stability and security.
Abe's "Three Arrows" and Kuroda's Monetary Experiment
In 2012, Shinzo Abe became Prime Minister and launched "Abenomics," a set of economic policies aimed at revitalizing Japan. A key component was a bold monetary policy led by Haruhiko Kuroda, the newly appointed Governor of the Bank of Japan (BOJ).
Kuroda embarked on a massive quantitative and qualitative easing (QQE) program, buying vast quantities of government bonds, exchange-traded funds (ETFs), and real estate investment trusts (REITs). This led to the BOJ becoming the largest holder of Japanese government debt and a major shareholder in many Japanese companies, effectively nationalizing a significant portion of the capital market.
In 2016, Kuroda introduced Yield Curve Control (YCC), a policy designed to keep the 10-year Japanese government bond yield at around 0%. The BOJ essentially became the regulator of the bond market, intervening to maintain the target yield. This effectively killed the Japanese bond market.
Mrs. Watanabe and the Yen Carry Trade
The YCC policy created a unique opportunity for investors, particularly "Mrs. Watanabe," a term used to describe Japanese retail investors and institutions engaged in foreign exchange and overseas investment. The near-zero interest rates in Japan made it attractive to borrow yen, convert it into other currencies, and invest in higher-yielding assets abroad.
This "yen carry trade" resulted in massive capital outflows from Japan, contributing to lower global financing costs and fueling asset price bubbles worldwide. The world benefited from cheap Japanese funding, but Japan itself experienced a falling yen and rising import prices.
The Cracks in the Dam: Inflation and the End of YCC
Starting in 2022, global inflation surged due to factors like the Russia-Ukraine conflict and supply chain disruptions. This time, Japan also felt the impact, with rising prices putting pressure on the BOJ to change course.
The BOJ, led by Kuroda and later Kazuo Ueda, began cautiously adjusting its YCC policy, widening the target band for the 10-year bond yield. Finally, in March 2024, the BOJ officially abolished YCC and ended its negative interest rate policy, signaling a major shift in its monetary policy stance.
The Global Implications and the "Tokyo Moment"
The end of YCC and the rise in Japanese interest rates have significant implications for the global market. As Japanese investors bring their money home, they are selling off overseas assets, particularly U.S. bonds, causing yields to rise.
This shift in Japanese monetary policy is impacting global bond markets, mortgage rates, and corporate financing costs. There are concerns about the potential for a global financial "tsunami" as the cheap funding from Japan dries up.
Japan's journey from economic giant to a nation grappling with deflation and back again has brought it back to the center of the world stage. The "Tokyo Moment" signifies a new era where Japan is a key variable influencing global financial trends. The world watches with bated breath as Japan navigates this new and uncertain terrain.