Japan’s currency was one of the first challengers to the U.S. dollar—why 90s predictions of a ‘yen bloc’ fell apart

Prophecies that the U.S. dollar will lose its status as the world’s dominant currency have echoed for decades—and are increasing in volume. Cryptocurrency enthusiasts claim that Bitcoin or other blockchain-based monetary units will replace the dollar. Foreign policy hawks warn that China’s renminbi poses a lethal threat to the greenback. And sound money zealots predict that mounting U.S. debt and inflation will surely erode the dollar’s value to the point of irrelevancy.

But contra the doomsayers, Paul Blustein argues that the dollar’s standing atop the world’s currency pyramid is impregnable—barring a catastrophic misstep by the U.S. government. In his book King Dollar: The Past and Future of the World’s Dominant Currency, he notes the dollar’s supremacy stems from several factors—mainly, the unrivaled depth, breadth, and liquidity of U.S. financial markets, as well as America’s legal and regulatory infrastructure.

Although other currencies have similar features and are used internationally to some extent, none can match the dollar. All alternatives have drawbacks that limit their global role. What follows is the story of one such major currency—the Japanese yen—and why it failed to take the dollar’s throne.

Kaiseki dinners featuring multiple courses of delicacies, exquisitely presented on hand-crafted ceramics and lacquerware, served by kimono-clad waitresses, washed down with free-flowing sake and other alcoholic beverages, followed by karaoke sessions with geishas simpering over the singing performances—that was the sort of hospitality accorded U.S. Treasury officials who traveled to Tokyo in the 1980s for “yen-dollar talks.” Their hosts held senior positions in the powerful Ministry of Finance, which gave them entree to the capital’s most exclusive dining establishments and nightspots, all costs covered by Japanese government expense accounts.

For all the delights of their evening entertainment, however, the Americans generally found these visits frustrating. Their goal was to persuade Japan to internationalize the yen by removing heavy regulations over the nation’s financial system and allowing money to move freely in and out of the country. This point bears repeating to ensure that it sinks in: The U.S. government wanted to make the yen more like the dollar; Treasury officials were not only willing to countenance another currency playing a global role similar to that of the greenback, they were insisting on it.

But progress was glacial. Their Japanese counterparts were skilled at parrying U.S. proposals with painstaking explanations of why Tokyo couldn’t take the measures Washington wanted or why, if implementation were to proceed, it would have to go “step by step” over a number of years. It didn’t help that the negotiations were typically conducted in a stilted atmosphere, with each side sitting opposite the other at long tables while dozens of junior Finance Ministry officials hovered along the walls and in nearby rooms to provide their superiors with logistical support.

U.S. impatience with Tokyo’s “step by step” approach was manifest at one session when Treasury Undersecretary Beryl Sprinkel, an ardent free marketeer with a stentorian voice, rejected the argument offered by the lead Japanese negotiator, Vice Minister Tomomitsu Oba. “I grew up in Missouri on a dirt farm,” boomed Sprinkel, who recalled that when piglets were born, “we had to cut their tails off. When we cut them off we didn’t cut them off one inch at a time! That would just hurt them more. We just hacked them off once up at the top and that was the end of it.” The translation, which took a few seconds to transmit, evoked shocked silence at first on the Japanese side of the table, until Oba laughed, which led to peals of laughter among his subordinates as well. The next day, Oba declared that he had understood Sprinkel’s story and henceforth Japan’s approach would change from “step by step” to “stride by stride.”

As the story suggests, U.S. officials, who were actively encouraging a competitor currency to assume some of the dollar’s international status, were up against a government that had no interest in mounting such a challenge. Japanese officials saw a low-profile yen as a crucial element in their nation’s postwar economic miracle, and they were loath to mess with success.

That miracle was then in full swing. Toyota, Nissan, and Honda had invaded the U.S. auto market in the 1970s and found it ripe for plucking; similar conquests had been achieved in consumer electronics by Sony and Matsushita Electric, in computers and integrated circuits by Fujitsu and NEC, in power generation and heavy machinery by Toshiba and Hitachi, and by other ultra-competitive Japanese firms in a host of sectors ranging from steel to construction equipment to machine tools. Books with titles such as Japan is Number One and Trading Places: How We Allowed Japan to Take the Lead explained to Americans how this resource-poor island nation, having rocketed to second place in the world’s GDP rankings and accumulated the world’s biggest stash of foreign exchange reserves, was on course to challenge the United States as the dominant economic power.

To attain such supercharged growth, Japanese policy makers had adopted a development model based on what economists call “financial repression,” the idea being to use the financial system for the benefit of the nation’s manufacturers and exporters. In the first quarter century after the war, these policies were draconian, with dollars and other foreign currencies carefully husbanded for allocation by bureaucrats to obtain machinery, technology, and other inputs from abroad needed to build industrial strength. So tight were restrictions on cross-border money movements during this period that as late as 1970, almost no Japanese trade was invoiced in yen. These regulations were loosened somewhat in subsequent years, but even in the 1980s, Japanese banks and savers were strictly limited in the amounts of money they could send abroad; government planners wanted a big pool of capital kept at home so that industrial firms could obtain the maximum amount of funding at the lowest possible interest rates. Another facet of this policy involved discouraging foreigners from buying yen in unlimited quantities lest that cause the exchange rate to rise, which would render Japanese goods less competitive on world markets.

Washington’s tolerance for these policies was at an end by the 1980s. U.S. manufacturers were in a lather about the handicap they faced as a result of the dollar’s strength vis-a-vis the yen. Moreover, American banks, securities firms, and money managers were clamoring for access to Japan’s protected financial markets. Under heavy U.S. pressure to shift away from its mercantilist practices, Tokyo agreed to a yen-dollar pact in 1984 that liberalized its financial system somewhat, and during the 1980s the percentage of Japanese exports denominated in yen rose from less than 30% at the beginning of the decade to nearly 40% by 1991. The yen-dollar deal was followed in 1985 by the Plaza Accord, which explicitly called for the yen to rise against the greenback

Although those agreements helped address U.S. grievances, Japan’s economic muscularity only grew more formidable than before. To counter the effects of endaka (yen appreciation) on exports, the Bank of Japan cut interest rates to historically low levels, which drove prices on the Tokyo Stock Exchange and property in major Japanese cities to stratospheric heights. Japanese multinationals adroitly coped with soaring costs at home by shifting much of their labor-intensive manufacturing overseas—to North America and Europe, where their customers were; and to East and Southeast Asia, where they could export their premium-branded goods from low-cost production bases. This process firmly entrenched Japan as the top trading partner and foreign investor for most of its Asian neighbors, giving Tokyo a degree of influence that Japanophobes found disconcerting. One oft-cited piece of evidence was how the 17,000 workers at Matsushita’s Malaysian plants donned Matsushita uniforms and started their days with the company song and calisthenics, just as employees did at Matsushita’s Osaka headquarters. “Japan has established a presence in the region so rapidly that talk of a ‘coprosperity sphere’ is already a cliché,” reported Newsweek in an August 1991 cover story which was titled “Sayonara, America” and lamented that U.S. companies were falling far behind amid an unprecedented burst of dynamism. “This year, for the first time since the Organization for Economic Cooperation and Development began keeping statistics, the Asian nations of Japan’s yen bloc will generate more real economic growth than either the European Community or the combined economies of North America.”

That phrase—”yen bloc”—was widely bandied about, referring sometimes to a trade zone that Tokyo would presumably control but also to the prospect that the Japanese currency, liberated from the shackles of financial repression, would dominate Asia to America’s detriment. The yen’s share of reserves in East Asia topped 17% by 1990, and the borrowing of yen surpassed the borrowing of dollars by those in Asia seeking foreign credit during this period. In 1995, in her Foreign Affairs article “The Fall of the Dollar Order,” Yale diplomatic historian Diane Kunz foresaw grave consequences: “As the yen area solidifies and the yen becomes the common Pacific currency, Americans will need to sell dollars for yen to conduct business with any Asian nation,” she wrote. “The death of the dollar order will drastically increase the price of the American dream while simultaneously shattering American global influence.” Later that year in another Foreign Affairs article, titled “Dominance through Technology: Is Japan Creating a Yen Bloc in Southeast Asia?,” Price Waterhouse consultant Mark Taylor warned that “U.S. firms may soon find themselves excluded from a Japan-centered regional economic bloc.”

This ballyhoo about the yen was poorly timed. By the mid-1990s the Japanese economy was mired in deflation following the bursting of its stock and property bubble. Among the authorities’ many desperate efforts to revitalize the economy was a “Big Bang” reform package in 1996 ending all remaining capital controls and including other steps aimed at turning Tokyo into a financial hub, much as London had done a decade earlier. But Japan could not overcome its legacy of financial repression. The nation’s banks, accustomed to being cosseted by the Finance Ministry, were saddled with bubble-era loans that neither they nor their powerful regulators wanted to recognize as unpayable. Seeing the banking industry struggling to stay afloat, foreign financial firms downsized their Tokyo operations and headed for other, more vibrant centers of Asian finance such as Hong Kong, Singapore, and Shanghai.

Even after further liberalization policies were adopted in 1999, the yen remained a distant also-ran as an international currency. It accounted for 5.5% of foreign exchange reserves in 2001, declining by 2016 to around 3%, and played a modest part even in Japan’s own trade, where it was used in only about 37% of Japanese exports and 26% of imports. Although Japan enjoys enviable wealth, its growth has remained anemic, stunted by a rapidly aging society and dwindling population, so its gravitational pull has never again come close to that which it exuded during the 1980s. The Bank of Japan has bought such vast quantities of the government’s bonds in its effort to stave off deflation that there has been very little trading in those bonds in recent years—yet another reason for the yen’s relatively low ranking in the currency league tables.

Perhaps if Finance Ministry officials had taken the moral of Beryl Sprinkel’s piglet story to heart and dismantled their controls much earlier, dollar users would have had strong motivation to shift to yen. But the opportunity was missed.

Excerpted from KING DOLLAR by Paul Blustein. Published by Yale University Press. Copyright © 2025 by
Paul Blustein. Used with permission. All rights reserved.

This story was originally featured on Fortune.com