Part 12/16:
Japan's unique position—owning vast foreign assets—gives it some insulation, but other economies are more vulnerable due to their reliance on foreign currency borrowing.
Implication:
A sudden withdrawal of dollar liquidity could trigger collateral shortages, asset collapses, and currency devaluations, as seen in emerging markets like Sri Lanka.
The FX Carry Trade and Currency Devaluation
Because Japanese yields remain near zero, investors exploit the carry trade, borrowing Yen cheaply to buy higher-yield assets globally. This depreciates the Yen over time and fuels speculative pressures. Japan's reluctance to hike interest rates risks prolonging this trend, especially as inflation modestly picks up but policymakers remain cautious.