Structural Risks to Japan from the Erosion of FRB Credibility

ーJapan’s Vulnerability as a State Anchored to U.S. Institutionsー

Executive Summary

Recent developments surrounding the Federal Reserve Board (FRB), most notably the criminal investigation involving Chair Jerome Powell, should not be interpreted as a purely domestic political issue in the United States. For Japan, these events represent an endogenous structural risk—one that directly affects monetary stability, external assets, and national economic security.

Japan is:

• One of the world’s largest net external asset holders
• Among the largest foreign holders of U.S. Treasuries
• Deeply embedded in the dollar-centric international monetary system

As a result, any deterioration in U.S. institutional credibility—especially the independence of the central bank—has first-order implications for Japan’s financial foundations. This report examines the scenarios Japan must critically monitor and the structural vulnerabilities they expose.

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1. Japan’s Starting Point: A Nation That Bet on Institutions

Japan’s post-war financial strategy has been internally consistent and rational.

• Foreign exchange reserves concentrated in U.S. dollars
• U.S. Treasuries treated as the ultimate safe asset
• Exchange-rate stability implicitly anchored to U.S. institutional reliability

This framework rests on a single, often unstated assumption:

U.S. institutions—especially the Federal Reserve—are insulated from political pressure.

For Japan, FRB independence has not been a philosophical ideal; it has been the practical justification for allocating national wealth.

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2. Primary Risk: The Qualitative Transformation of U.S. Treasuries

If the perception takes hold that the FRB is politically vulnerable, U.S. Treasuries undergo a fundamental reclassification.

• Previous status:
  Institutionally risk-free assets
• Emerging status:
  Assets with embedded political risk

This is not a question of yields or mark-to-market losses.
For Japan, the risk lies in a qualitative degradation of reserve assets.

Once U.S. Treasuries are no longer viewed as institutionally neutral, Japan’s reserve strategy loses its theoretical anchor—regardless of short-term price stability.

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3. Secondary Risk: The Hollowing-Out of the Yen’s Safe-Haven Role

Traditionally, global stress follows a familiar pattern:

• Dollar instability → Yen appreciation

However, current conditions challenge this mechanism.

• The yen is constrained by prolonged monetary accommodation
• Bank of Japan faces limited policy flexibility amid inflation and fiscal concerns

If confidence in the dollar weakens while the yen lacks institutional credibility as an alternative, Japan faces a new scenario:

• The dollar becomes unstable
• The yen fails to function as a credible refuge

This is not standard currency depreciation.
It is the risk of the yen becoming structurally non-selectable in global portfolios.

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4. Tertiary Risk: The Global Normalization of Politicized Monetary Policy

Should the United States normalize:

• Electoral pressure on interest-rate decisions
• Direct or indirect intimidation of central bank leadership

Such behavior will not remain isolated. It will become implicitly permissible globally.

For Japan, this creates acute pressure:

• The relative independence of the Bank of Japan becomes harder to defend
• Domestic political arguments emerge questioning restraint
• Fiscal-monetary boundaries risk blurring once again

Japan has historical experience with politically driven monetary policy.
This is not a theoretical risk—it is a known failure mode.

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5. Quaternary Risk: Forced Policy Synchronization with the United States

If U.S. monetary policy becomes increasingly aligned with political calendars rather than macroeconomic conditions, Japan may face pressure to follow suit.

• Policy decisions justified by “global coordination”
• Actions driven by U.S. timing rather than domestic conditions

The danger here is not policy error per se, but policy opacity.

• Decisions become difficult to explain
• Accountability becomes diffuse
• Course correction becomes politically costly

This represents institutional fatigue rather than a single mistake.

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6. The Worst-Case Configuration: Loss of All Safe Anchors

The most severe scenario for Japan is the simultaneous occurrence of:

1. Declining FRB independence
2. Erosion of the institutional premium on U.S. Treasuries
3. Relative weakening of the yen’s safe-haven status

In such a configuration, Japan loses both:

• A stable reserve asset
• A credible domestic currency anchor

This is not a market shock.
It is a balance-sheet problem at the level of the state.

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Conclusion: Japan’s Strategic Challenge Is a Collapse of Assumptions

The central risk for Japan is not U.S. recession, dollar volatility, or temporary financial stress.

It is the erosion of a foundational assumption:

That U.S. institutions are structurally insulated from politics.

Japan’s external reserves, exchange-rate policy, financial stability framework, and economic security strategy have all been built on that assumption.

What is now required is not crisis management, but intellectual and institutional preparation for a world in which that assumption no longer holds.

The question Japan must confront is no longer hypothetical:

Will Japan continue to bet on institutional exceptionalism,
or will it redesign its financial strategy to price institutional risk itself?

That decision point has already arrived.