BLI: Neither governance nor yen
By Sébastien Gandon, Senior Client Portfolio Manager, Banque de Luxembourg Investments (BLI)
Every few years, foreign investors rediscover Japan, then drift away again. This time the headlines - the yen, the bond market, a rare US intervention - are the least of it. The real story is something the country has spent thirty years quietly building, largely unwatched.
Japan is back in the macro headlines. On 31 July, the US Treasury bought yen alongside the Japanese Ministry of Finance - the first coordinated US-Japan intervention since 1998. Scott Bessent described it as a correction of the yen's substantial undervaluation, and both capitals have said they won't hesitate to act again.
It is merely the latest instalment. The newsflow on Japan has, of late, circled the same three themes: the bond market, the yen, and corporate governance. Between them they have crowded out almost everything else worth saying about the country.
The currency matters, and the governance reforms are real. But neither is quite where the story lies. What the intervention reveals is more interesting than what it does: something assembled patiently, over thirty years, has become worth a great deal to people who had no hand in building it.
Governance Is the Known Half of the Story
Start with where Japan came from. In 1989, four of the five largest companies in the world by market value were Japanese banks. Corporate Japan was bound together by cross-shareholdings - companies owning their suppliers, their customers and each other - so that a firm's shareholders were also its lenders and its trading partners, none of whom cared much what it earned. Capital allocation followed accordingly: market share came before profit, and returns on assets trailed the rest of the developed world.
Most of that structure has since come apart, and the cross-shareholdings have unwound steadily - a process well underway before anyone in Tokyo made it official policy. Then, in 2023, the Tokyo Stock Exchange told the roughly 1,800 listed companies trading below book value to publish plans for earning more than their cost of capital.
What makes it interesting is the enforcement mechanism: there isn’t one. No fine, no legal obligation - the TSE simply publishes a monthly list of who has complied. In a business culture where standing apart from the group is itself a cost, that turned out to be sufficient.
Disclosure among Prime Market companies went from roughly half to over ninety percent within a year. This is real progress, and it sits alongside the broader case our CIO has made for governance reform as a structural investment opportunity across Asian markets.
The harder question is whether any of it reaches the mindset of the people running these companies. Today's generation of management took over after the bubble burst, most of them through the factory rather than the finance department.
This matters, because an engineer who has spent his career on a production line tends to judge a decision by what it does to the product, not by what it does to the share price. Having watched their predecessors preside over the wreckage, they did not need a disclosure rule to teach them that debt kills.
The transformation that matters, then, is not the one on the disclosure list - it is in the accounts. Sales across corporate Japan have gone more or less nowhere in three decades; profits, over the same period, have multiplied several times over. That gap came from thousands of individual decisions to hold price and protect margin rather than chase volume - the discipline the old model lacked, and the one thing no disclosure rule can compel.
There was no collective change of heart. The companies still standing are simply the ones that adapted, and they adapted long before anyone was grading them on it. Sony did not leave televisions for image sensors on anyone's instruction; it did so by out-engineering its competitors while the market's attention was elsewhere. The real story was never about ticking boxes, even if the boxes are now being ticked.
The yen is not the point either
The yen's long decline is not in dispute. What is worth questioning is the assumption bolted onto it: that a weaker currency has been driving Japanese corporate profits, and that a stronger one would take them away.
It used to work that way. Toyota built its cars in Japan and sold them abroad, so a falling yen flattered the accounts. Not anymore: Japanese manufacturers now build where they sell, matching local costs against local revenue - Toyota's recent record investment in the United States is only the latest instalment of a process that has run for years. What remains is a translation effect in the accounts, not a competitive one.
More telling is what companies now do with a currency move. They once competed it away, cutting prices to defend market share whenever the yen fell; now they hold price and let the windfall fall through to profit. It is the same discipline again, showing up as a run of record earnings.
The bill for a weaker yen has not gone unpaid, though - it has simply landed on households rather than companies. The mechanism is straightforward: manufacturers that produce where they sell, and hold their margins, are largely insulated from the currency, while households buy imported goods and energy priced in dollars and pay the difference directly. Cheap funding has, meanwhile, made Japanese assets a bargain for anyone borrowing in yen and paying in dollars - and the sense that thirty years of collective sacrifice are being harvested by outside capital is widely held, and not without foundation.
The currency is not an abstraction in Tokyo: it has become Sanae Takaichi's central political problem, and the erosion of her once-commanding poll lead has tracked the cost of living closely. Even the tourists are a symptom - foreign visitors have arrived in volumes that have turned parts of the country into something closer to Venice, drawn by the same cheap yen the residents are paying for.
That is the context the intervention stepped into. The US Treasury put its own balance sheet behind the effort. Why?
Two answers are usually given. The first is that Japan is the largest foreign holder of US Treasuries, and Washington would rather Tokyo did not have to sell them to pay for defending its currency. The second is contagion; other Asian currencies might follow it down, which makes American products less competitive. Both are fair as far as they go.
There is also something happening on the Japanese side of the trade. The Bank of Japan has been widely criticised for raising rates too slowly. We read that reluctance differently. With government debt somewhere between two and three times GDP depending on the measure, every increment on the policy rate feeds through to debt servicing on a scale no other developed economy has to contemplate. Caution, in that light, looks less like timidity than arithmetic.
But inflation still has to be dealt with, and Japan imports almost all of its energy and much of its food, priced in dollars. A weaker yen therefore feeds straight into the cost of living - which is precisely why the currency has become the government's political problem. A stronger yen does much of the same disinflationary work as a rate rise, and does it without adding a yen to the interest bill.
On that reading Tokyo has its own reasons to want the currency higher, quite apart from anything Washington wants, and the two capitals are rather better aligned than a one-off intervention suggests. None of which is a forecast. But it does suggest that exposure to a stronger yen deserves rather more consideration than it has been getting.
The business of making things
Dollars can be printed; shipyards, machine tools and missile production lines cannot, and Japan retains the capacity to produce them at a standard very few can match - a ‘savoir-faire’ and habit of continuous improvement compounded over decades (known as Kaizen in Japan), the kind of capability that is lost quickly and rebuilt only slowly, if at all, as several Western economies have discovered.
In the 1980s, Japanese manufacturing was the benchmark against which everyone else was measured, and the anxiety in the West was that it always would be. Then the bubble burst, and Japan fell out of the conversation for thirty years. It kept making things throughout; everyone else simply stopped looking.
Why the attention went is a fair question. It has suited Beijing for the world to believe that China is the future and Japan the past, and that belief settled comfortably into Western media and investment committees alike, even as the machine tools in Japan kept being built.
There may be something deeper at work too. The psychologist Richard Nisbett1 once showed animated underwater scenes to American and Japanese subjects and asked what they saw. Americans led with the biggest, fastest fish; Japanese subjects were far more likely to begin with the setting - the water, the rocks, the relations between things - referring to background elements more often. Western attention fastens onto the salient object; East Asian attention takes in the field.
Which is precisely the opening a country creates when it stops being the object. Japan withdrew from the foreground - from the brand on the box, the nameplate on the building - into the background of everyone else's supply chain, and to an audience trained to watch the object, a country that has become the field is close to invisible. That withdrawal was, at least in part, deliberate, and one episode illustrates it particularly well.
Extreme ultraviolet lithography, the technology behind every advanced chip made today, was developed in the 1990s by a consortium of American chipmakers working with three US national laboratories. Japan's two lithography giants were kept out of it: Nikon withdrew rather than provoke a political row over handing US-funded strategic technology to a Japanese champion, and Canon was blocked outright by Washington. The licence went instead to a smaller Dutch company everyone could live with. The rest is ASML's history.
The lesson appears to have been learned. Visibility invites retaliation; the safer place is inside the machine, not on the front of the box. And so the image sensors in the phone, the equipment that makes the chips, the world's most efficient gas turbines, the endoscopes and catheters used in operating theatres everywhere: Japanese, and largely anonymous.
Late in 2025, Japan made its first export of finished lethal weapons to the United States - Patriot interceptors, built domestically, to refill American stockpiles depleted by the war in Ukraine. It is the only country outside the United States able to build that interceptor.2
Conclusion: the buyer that matters
If Japan has quietly built something the world now needs, the question that follows is who will end up owning it. For most of the past forty years, the answer was: foreigners.
Japan's marginal investor was almost always from abroad, which is why the market rarely traded on its own fundamentals - it behaved as a high-beta global cyclical, moving on flows decided in London and New York rather than on anything happening in Tokyo.
Foreign investors arrived in waves - 2005, 2013, 2017 - and each time they left again. So the question is less about foreign capital than about what domestic investors do next. They are the buyers that matter.
And Japanese investors are, collectively, among the largest owners of foreign assets in the world - a generation of Japanese savers who have spent their careers not owning their own market. The logic held while it lasted: with the yen falling and low domestic interest rates, foreign assets were simply the better bet.
Reverse the currency and the arithmetic inverts, particularly once the cost of hedging is added in - which is precisely why those foreign holdings were left unhedged in the first place. And the mechanism, once started, tends to feed itself: repatriation lifts Japanese assets, a stronger market draws more capital home, and a stronger yen improves the case for the next allocation. Whether it has actually begun is unclear - the false dawns have been many.
This is not a uniquely Japanese question. Russell Napier3 has made the point by way of Emmanuel Macron, who asked why French assets should be funding American ones. In a world busily deglobalising, capital coming home is becoming the theme rather than the exception - and Japan simply has more of it to bring back than anyone else.
It may not even wait for private savers. The Government Pension Investment Fund - at roughly USD 2 trillion, the largest pension fund in the world - still runs an allocation mix set several years ago, with a substantial share of it invested abroad. Tokyo has been unusually direct about wanting that shifted towards domestic assets.
In July the Prime Minister said households and pension funds, GPIF among them, should put more into Japanese financial assets; her finance minister had already floated a substantial increase in domestic holdings, and the yen and the JGB market firmed on the remark alone. A single revision to that mandate would move more money home than a decade of foreign enthusiasm ever did.
But a country that has quietly built something the rest of the world now needs would, for the first time in forty years, be owned principally by the people who built it. That would be a seismic shift. One suspects the prospect holds Washington's attention rather more firmly than anything happening in the Treasury market.
1 The Geography of Thought, by Richard E. Nisbett.
2 Confirmed by Chief Cabinet Secretary Minoru Kihara, 20 November 2025. PAC-3 interceptors built by Mitsubishi Heavy Industries under Lockheed Martin licence, drawn from Japan Air Self-Defense Force stocks at Washington's request.
3 Independent strategist specializing in financial markets, financial historian, and author.