Tokyo, Japan – The Bank of Japan (BOJ) has initiated U.S. dollar funds-supplying operations against pooled collateral, a move announced on July 15, 2025, and effective July 17, 2025. This action, described by some analysts as "preemptive firefighting," comes amidst growing concerns over global dollar liquidity, rising hedging costs, and potential instability in the repurchase (repo) market, echoing conditions seen before past financial crises. The development follows the BOJ's significant policy shift in March 2024, when it ended its negative interest rate policy (NIRP) and the long-standing Yield Curve Control (YCC) framework.
The tweet from "Walk In The Clouds🇺🇸" highlighted a complex and potentially perilous economic backdrop for Japan, stating, "当前日本面临收益率曲线不稳、套保成本上升、资本外流风险，但同时却被要求继续提供美元流动性，形成危险的反馈回路。" This translates to Japan facing an unstable yield curve (though YCC has since ended), rising hedging costs, and capital outflow risks, while simultaneously being required to provide dollar liquidity, creating a dangerous feedback loop. The tweet further noted, "BOJ接受“混合抵押品”发放美元，说明全球优质美元抵押品（如美债）匮乏，与过往危机前的“抵押品危机”相呼应，显示回购市场深层失稳。" This suggests that the BOJ accepting "mixed collateral" for dollar issuance indicates a scarcity of high-quality dollar collateral, such as U.S. Treasuries, reminiscent of "collateral crises" preceding past downturns, pointing to deep instability in the repo market.
The BOJ's decision to accept a wider range of collateral for dollar funds reflects a broader challenge in the global financial system, where the availability of prime dollar-denominated collateral may be constrained. This echoes concerns about "collateral scarcity" that have surfaced during previous periods of market stress, including the 2008 financial crisis and 2019 repo market disruptions. Japanese financial institutions have historically engaged in U.S. dollar carry trades, leveraging cheap yen to invest in higher-yielding U.S. assets, but rising U.S. interest rates and a weakening yen have increased the cost and risk of these operations, leading to mounting pressure on these firms.
Japan has also experienced significant capital outflows, with Japanese stocks seeing their largest weekly outflow in 20 years in October 2024, amounting to $9 billion. While Japan has historically been a major capital exporter, recent shifts indicate investors seeking higher returns abroad or repatriating funds due to domestic inflation. The tweet also pointed to the Japanese government's cross-party discussions on price stability, noting, "日本政府公开跨党派讨论价格问题，显示通胀压力已无可否认，这与1998和2020年财政刺激前情境相同。" This indicates that inflation, long absent from Japan, is now an undeniable concern, drawing parallels to the lead-up to fiscal stimulus measures in 1998 and 2020. The Bank of Japan is now forecasting inflation to ease to around 2% in the fiscal year ending March 2026, though uncertainties remain.
The confluence of these factors—the BOJ's intervention in dollar liquidity, concerns over collateral quality, rising hedging costs, capital outflows, and the re-emergence of inflation as a policy priority—presents a complex economic landscape for Japan. While the BOJ's actions aim to maintain financial stability, they underscore underlying vulnerabilities in both domestic and global markets.