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From the Corner Café to the Global Market: Building an Inclusive Intellectual Property System Across APEC

[from APEC News, by María Gloria Riethmüller Harland, Singapore]

Every day, I pass by small businesses that bring life to our neighborhoods. A corner café with its own blend, a family bakery known for its special recipe, a local designer selling clothes under her own brand. Few of them would think of themselves as intellectual property owners, yet in many ways they are.

Their innovative brands, recipes and ideas are often their most valuable assets. But for most small businesses, intellectual property still feels like something meant for large companies with legal teams.

Over the last two years of chairing the APEC Intellectual Property Rights Experts’ Group (IPEG), one conviction has only grown stronger. Intellectual property should not be a privilege for a few. It should be the foundation that lets anyone with a good idea earn from its expression and grow. It should spark more creativity across our region. It should help build new businesses, new jobs and shared prosperity.

In practice, for a small business owner, the system can feel complex, costly and hard to navigate. The landscape is also changing quickly, as new technologies and online trade reshape how ideas are made, shared and protected.

When IPEG was created in 1997, its focus was making global trade rules on intellectual property work between economies. Over time, its work has grown to place small businesses, along with women, young innovators and local communities, at the center.

Our work over the past two years has been about making that shift real.

Small businesses, big ideas

Micro, small and medium enterprises (MSMEs) account for more than 97 percent of businesses in the APEC region. The challenge is not whether they have valuable ideas, they do. The challenge is turning those ideas into growth.

Intellectual property can help small businesses protect what makes them different, secure finance and expand into new markets with confidence.

The difference can be striking. A study [archived PDF] by IP Australia found that new small businesses that filed for intellectual property in their first year were twice as likely to achieve strong sales and employment growth. Yet the study found that only a small fraction of MSMEs own intellectual property.

That is why small businesses sit at the heart of IPEG’s 2025-2026 Work Plan.

Some of the most valuable lessons came from simply listening. Last year August in Incheon, I moderated our Policy Dialogue on Intellectual Property for Business, with a focus on SMEs. Our conversations were honest and practical, from making the system more user-friendly for small business owners to the opportunities e-commerce opens for them.

Conversations matter, but only if they lead to change. This one did. Following the dialogue, the World Intellectual Property Organization (WIPO) offered member economies the opportunity to embark on a project, asking small businesses directly how they understand, use and perceive intellectual property, and what stands in their way. Such projects aim to help offices and policymakers across the region build systems and support around real needs, not assumptions.

When we met in Dalian this August, the progress was clear. Some economies shared how they are running training workshops that help firms, especially technology startups, identify and actively manage their intellectual property strategically. Others are offering support in valuing patents, so small businesses can use their inventions to secure loans.

Step by step, intellectual property is becoming a tool small business owners and innovators can actually use, not just one they hear about.

Keeping pace with technology

Technology is changing how ideas come to a reality and are sold. But it is also changing how we protect those inventions, giving intellectual property offices new tools to work faster, smarter while making systems simpler for business owners.

Take patents, which protect new inventions. To get one, an inventor has to prove their idea is genuinely new. With a record 3.7 million patent applications filed worldwide in 2024, that is no small task.

Artificial intelligence search tools can now help compare applications more thoroughly rather than simple keyword matches. Chatbots walk first-time applicants through the search process. New translation tools make it simpler to understand patents filed across the region.

For a small business, this is far from a technical detail. Faster and more accurate searches mean knowing early whether an idea is genuinely new, before spending money on an application and investing in their venture.

Used well, technology can turn a complex process into a quicker, clearer path to protection.

Every idea counts

But a system is only as strong as the people it reaches.

Women, for example, accounted for just 18 percent [archived PDF] of inventors named in international patent applications in 2024. For the people and communities behind unprotected good inventions, that means missed income, missed recognition and missed growth.

Changing that takes partnership. By enhancing dialogue with APEC’s Policy Partnership on Women and the Economy, IPEG can build women entrepreneurs’ know-how on using intellectual property to protect their brands and designs, helping them to grow internationally.

Every region also has its own valuable cultural or geographical assets, while communities also carry traditions passed down over generations, from recipes and crafts to songs and stories. They are not just part of communities’ heritage and pride. For many, these traditions and assets can become sources of income. Intellectual property plays a vital role here too.

Geographical indications, labels that tie a product’s name to its place of origin, are one way to do that. Across the region, they are helping more small local businesses and women-led enterprises stand out from imitations, reach new buyers and become more competitive.

Copyright is reaching folk art too, from traditional stories to music and designs. Clear rights give communities the confidence to share their traditions widely and give new generations a reason to keep creating with them.

Inclusion is not a side project for intellectual property. It is the test of whether the system works at all. When intellectual property reaches more people, more creations reach the world, benefiting workers, MSMEs, communities and consumers. That simple belief has guided IPEG’s work for the past two years.

In August, I chaired my final IPEG meeting in Dalian. What I value most is not any single outcome, but the spirit behind our work.

IPEG is a space for dialogue. A space to ensure intellectual property drives resilience, innovation and growth. A space where economies with different experiences work together to make intellectual property more meaningful and accessible.

That space matters more than ever. New technologies, new business models and new forms of creativity are creating both opportunities and challenges. I encourage IPEG to keep using this forum not only to exchange information, but to thinking creatively about where APEC cooperation can make more tangible differences.

Because in the end, the measure of our work is simple. It is whether the corner café, the family bakery and the young designer down the street can turn their innovations into a lasting livelihood.

María Gloria Riethmüller is the Chair of the APEC Intellectual Property Rights Experts’ Group (IPEG) and Legal Advisor at the Intellectual Property Department of Chile’s Undersecretariat of International Economic Affairs.

Japan-Watching: Yen Repatriation: The Tide Is Turning

From 2014 to 2025, Japan bought foreign securities worth about 2% of GDP a year. In 2026 the tide is turning. Banks are selling foreign bonds and capital flow has turned to a small net inflow.

[by OKUBO Takuji]

Key takeaways

Japan has been an exporter of capital since the 1980s, purchasing 2–3% of GDP worth of foreign assets every year, interrupted by episodes of yen repatriation from time to time. 2026–27 may be turning into such an episode.
Banks are selling foreign bonds and buying JGBs. Now that yen yields are higher, their JGB purchases leave less room for duration risk in foreign bonds.
Households keep buying foreign stocks, but pension funds are selling against them, offsetting the net purchase of foreign equities.
Pension funds are likely to put more money into yen. On my replication of GPIF’s allocation rule, its domestic-bond weight should be much higher than today’s 25%, and foreign bonds are the likely asset class to give way.
The weekly survey to 10 October shows foreign-bond selling continuing. In my view, yen repatriation in 2026–27 is a question of how large, not whether.

Japan’s outward flow has turned into a net sale

Japan has been a large provider of capital to the rest of the world since the 1980s. The latest wave began in 2014. From 2014 to 2025, residents bought ¥13.6trn a year on average, about 2.3% of GDP.

Chart 1 shows the flow as a rolling twelve-month sum. The one large exception was 2022, when bond yields rose sharply abroad and Japanese investors sold their holdings, realizing losses on their foreign bonds. They went right back into purchasing foreign securities in 2023 when yield curves in major foreign bond markets stabilized, while domestic bond yields remained close to zero. How Japanese investors behave now that yen yields are respectable is the big question.

Chart 1: Rolling twelve-month flows, stacked separately above and below zero. Short- and long-term debt combined; black line is the net total. BoP through August 2026; September estimated from the MOF monthly survey. Source: MOF, BoJ, JMA.

The flow is turning again in 2026. By August 2026 the rolling total was a small net sale of ¥1.5trn (see chart 1 above). September’s balance of payments statistics are not out yet, but based on the International Transactions in Securities Survey for September, I estimate that the rolling total would be a net sale of ¥4.5trn. September itself was a small net sale; most of the drop comes from September 2025’s ¥2.8trn of buying leaving the window.

Foreign bonds and foreign equity have different investors

In the rest of the report, I discuss recent developments in Japan’s capital flows. I have organized the discussion by asset class because the investor bases differ. Banks, the FX reserves managed by the government, pensions and insurers hold foreign bonds. In foreign equity, households are now the key investors, alongside pensions and other traditional investors. GPIF and other pensions sit in both markets, so I discuss them in a part of their own.

Part 1 covers foreign bonds, where repatriation would show first. Part 2 covers foreign equity, where households keep buying while pensions sell against them. In Part 3, GPIF is the key mover in both markets. In Part 4, I discuss the most recent developments, using the weekly survey, which runs to 10 October, and what to watch. The focus of this report is return-seeking portfolio investment, so analysis of the Japanese government’s FX reserves is covered in Japan Cashes In Its National Carry Trade (31 July) and Japan Inc.’s real investment is covered in Japan Inc. Now Sells No Yen to Invest Abroad (10 October).

Japan holds 147% of GDP worth of securities abroad

Before moving to discuss recent developments, let me give you a brief historical perspective on Japan’s outward investment. Japan has been a creditor nation since the 1980s. In 1985–89, Japan invested 3–5% of GDP, as Japan was awash with bubble money. Since then, Japan has typically invested 2–3% of GDP a year in foreign securities, with some episodes of repatriation from time to time. At end-2025, Japan held ¥982trn in foreign portfolio securities and official reserve assets: ¥401trn of equity and fund shares, ¥368trn of portfolio debt and ¥214trn of reserves (chart 2). Reserves are mostly US Treasuries plus some deposits and gold. The ¥401trn in equity and fund shares actually includes some bond funds that are categorized inside “equity and fund shares” in official statistics, so we will make some adjustments when we discuss investor behavior by asset class in later parts.

Chart 2: Official year-end holdings, 1996–2025. Equity is the bottom band, portfolio debt the middle band and official reserves the top band. Debt and reserves use related colors. Current BPM6-rearranged IIP; funds classified by legal form. Source: MOF, BoJ, JMA.

Part 1. Selling foreign bonds in 2026

Banks, reserves, pensions and insurers own the bonds

Of the ¥214trn the Japanese government holds as reserves, ¥157trn is debt securities and the rest is gold, deposits and other claims. Add this ¥157trn to the ¥368trn of private debt securities and an estimated ¥47trn of bond funds that are categorized as “equity and fund shares” in the balance of payments statistics, and you get ¥573trn of debt securities held by Japan at end-2025. By my estimate, banks held 32% of it, official FX reserves 27%, public and corporate pensions 19% and insurers 14% (chart 3).

Chart 3: End-2025, JMA estimates. Bonds and bond funds, reserve securities included; trust-account and fund holdings are assigned to their owners. Source: IMF, GPIF, BoJ, MOF, PFA, JMA.

Banks are selling while pensions keep buying

Chart 4 shows movements in foreign long-term bond flows by investors since 2014. We see pension funds as the consistent buyer, with an elevated purchase in 2020 when GPIF raised its foreign-bond asset allocation target from 15% to 25% (see the Japanese Macro Advisors GPIF report for details). On the other hand, life insurers have been consistent net sellers in recent years. Banks seem to be opportunistic swing players. This year’s foreign-bond sale so far is a bank story.

Chart 4: Foreign long-term bonds by investor. Full calendar years 2014–2025; the two separate bars at right compare January–September 2025 and 2026. MOF monthly survey throughout. Source: MOF, JMA.

The bank balance sheets show who is selling. City banks are the dominant players: their foreign securities reached about ¥53trn in late 2024, moved sideways with some swings in 2025, and then fell in 2026. Regional banks’ foreign holdings are small and little changed (chart 5).

Chart 5: Foreign securities held by city banks and regional banks, month-end book value, banking accounts, through August 2026. Source: BoJ, JMA.

2026 is different from 2022: Yen rates are at 30-year highs

City banks went through a similar repatriation episode in 2022 (see chart 5), but went right back to buying foreign bonds in 2023 as soon as the overseas yield curve stabilized. 2026 offers a different environment. Both city banks and regional banks are buying JGBs, although in different parts of the yield curve. City banks are stepping up their purchases of 10-year bonds on a rolling 12-month basis (chart 6). They were selling the 2–5-year and super-long sectors in early 2026, but their rolling 12-month figures have just come back to neutral. Regional and co-operative institutions are showing strong appetite for the 2–5-year and 10-year sectors. Banks buying at home does not necessarily mean selling bonds abroad, but their JGB purchases do leave less room for duration risk in foreign bonds.

Chart 6: Net secondary-market OTC purchases, twelve months through August. Regional/co-operative group includes regional banks, shinkin and agricultural institutions; auctions and bills excluded. Source: JSDA, JMA.

Part 2. Pension funds are selling foreign equity, offsetting households’ buying

Pension funds and households are the top two owners of foreign equity (chart 7). As you can see in chart 8, households have been showing a strong appetite for foreign equity investment trusts since 2024, and they are still buying. NISA accounts, low-cost funds and retirement savings are behind it, and I expect it to continue. Mrs Watanabe No More (21 September) tells that story in full.

Chart 7: End-2025, JMA estimates. Equity and equity-type funds; trust-account and fund holdings are assigned to their owners. Source: IMF, GPIF, BoJ, MOF, PFA, JMA.

Chart 8: Monthly net purchase of overseas- and global-equity investment funds. Source: ITA, JMA.

The strong appetite of households for foreign equity has been offset by selling by pension funds though. Over the twelve months to August, households bought ¥11.9trn of foreign equity through investment trusts, but pension funds through their trust accounts sold ¥11.5trn (chart 9).

Chart 9: BoP rolling twelve-month flows through August. Households are investment-trust managers’ purchases. Trust accounts are a pension proxy. Source: MOF, BoJ, JMA.

Why do pensions sell what households buy? Pension funds typically manage their assets to target weights. When foreign equities outperform, they sell some and buy other assets to restore the balance.

Part 3. Pension funds to put more money in yen

GPIF likely to raise its asset allocation into yen bonds

As you can see in the two pie charts (charts 3 and 7), GPIF and other pension funds are key players in Japan’s investments in foreign bonds and equity. GPIF, with ¥320trn of assets under management, is the big whale, and changes in its asset allocation have played a significant role in defining Japan’s cross-border capital flows in recent years.

For details on my views on GPIF, I refer readers to the “GPIF the Whale” report. Here is the gist. GPIF reduced its domestic-bond allocation target from 60% to 35% in 2014 and to 25% in 2020, partly to protect the fund from a JGB crash it saw coming (chart 10). The crash has already happened, in slow motion over the last two years. When GPIF last reviewed the asset allocation in early 2025, maintaining the target unchanged at 25% made sense. At the time, JGB yields had more room to “normalize”, and they did. Please see my report The Long Climb in JGB Yields Is Nearly Over (20 July) for why I think the normalization is largely over.

On my simplified replication of GPIF’s allocation rule, a zero expected real return on JGBs points to a domestic-bond weight of about 50%, against 25% today. A move to 50% means about ¥80trn of assets shifting toward yen bonds, and foreign bonds are the likely asset class to give way. For more details, please see Yen Repatriation Starts with the Whale (10 September). It is a tricky shift, as GPIF is a classic whale in financial jargon, and there is a legitimate concern that other investors could front-run it. But GPIF cannot ignore the asset-allocation arithmetic. GPIF’s July–September results, due in early November, are the first place a shift could show, but even if it doesn’t, it is just a matter of time in my view, as GPIF would be doing Japanese pensioners a disservice if it did not change the allocation.

Chart 10: GPIF policy targets for domestic bonds and 10-year JGB yield, through 8 October 2026. Source: GPIF, MOF, JMA.

Part 4. Recent development and what to watch

Weekly data shows bond selling continuing into October

The balance of payments is the key statistic for monitoring cross-border capital flows, but as of mid-October it runs only to August. The Ministry of Finance’s weekly survey of large investors is a good leading indicator and runs to 10 October. In the four weeks to 10 October, Japanese investors sold a net ¥3.3trn of foreign long-term bonds. Chart 11 shows the 52-week and 13-week averages.

Chart 11: MOF weekly survey of designated major investors. 13- and 52-week trailing averages, approximately three and twelve months, through 10 October. Both lines show average net purchases per week, not cumulative totals. Source: MOF, JMA.

Equity flows have no sustained direction

The same weekly survey includes equity flows. They have some ups and downs, but the 52-week average is hugging the zero line, and I do not see any particular trend upward or downward (chart 12). The equity data add no repatriation signal to the bond evidence.

Chart 12: Same weekly survey, smoothing windows, dates and vertical scale as Chart 11; foreign equity and fund shares. The 13-week line shows recent swings; the 52-week line shows the smaller underlying net flow. Source: MOF, JMA.

What to watch

The weekly survey is the first test of whether bond sales persist. The September balance of payments, due in early November, will test the estimate in the opening. The other releases are in the table below.

Conclusion

The capital-flow tide is turning

As this report showed, Japan has been a broadly consistent provider of capital to the rest of the world, and Japan will continue to play that role for many years to come. However, the tide turns from time to time, and 2026 seems to be such a year. Net portfolio flow has narrowed from a sizable outflow in 2024–25 to a small net sale in the latest months, even while households continued to show strong appetite for foreign equity. Banks seem to be increasing their appetite for yen bonds, with good reason. JGB yields have risen to a 30-year high. Some may claim the rise has to do with higher fiscal premia, but my yield-curve analysis in Japan’s Fiscal Vigilantes Are Misreading the Curve (16 July) shows otherwise.

In my view, this shift weakens one of the forces behind the weak yen. Higher yen yields give investors a reason to keep shifting toward domestic bonds. I see a moderate chance that the turn in foreign bonds develops into a larger net repatriation, with GPIF’s asset allocation decision as a potential key mover. If global financial markets were to suffer a setback, whether in the euro bond market or the US stock market, it would further strengthen the case for yen repatriation. In my view, Japan’s capital flows are likely to show yen repatriation in 2026–27; the question is how large, rather than whether it will happen.

Japan-Watching: Takaichi hints at shifting stance on Yana

[by Tobias Harris, Japan Daily Briefing]

Prime Minister TAKAICHI Sanae [高市早苗] faced questioning in the House of Representatives budget committee Tuesday, with opposition and ruling party lawmakers questioning whether Agriculture Minister YANA Kazuo [簗和生] needs to quit or be dismissed as allegations of political misconduct mount. The prime minister was also pressed for more details on plans to finance the consumption tax cut. A new poll showed that the Yana scandal could be beginning to hurt the government’s support. [Update: On 14 October, 2026, Yana submitted his resignation to Takaichi, which was accepted.

Pressure on Yana to quit grows

(Agriculture Minister YANA Kazuo [簗和生] answers questions in a lower house budget committee hearing on 13 October. Screenshot by author.)

Japanese lawmakers returned to the business on Tuesday, 13 October following a holiday weekend and resumed their questioning of Prime Minister TAKAICHI Sanae in a meeting of the lower house’s budget committee. Asahi provided a timeline of the day’s deliberations here.

The calls for Takaichi to dismiss Agriculture Minister YANA Kazuo [簗和生] – in the event that he does not resign voluntarily – have continued to grow. The opposition parties have continued to threaten an upper house censure motion if he does not leave, though they appear to be inclined to wait to see whether he or Takaichi will take the decisive step first (and they may also see some value in Yana staying around longer to give them additional opportunities to attack the government). A censure motion is also not guaranteed to pass the upper house since the opposition parties would need to bring along some of the upper house’s independents.

It is possible that, in response to reporting that Yana violated election law in providing free transportation to his supporters during campaigns, Takaichi may be backing away from her support for her embattled agriculture minister. She said in the committee hearing Tuesday that if Yana had engaged in any illegal activities, she would not hesitate to remove him and suggested that she is seriously considering whether he can contribute to her government’s work, though she also said that she wanted to give him a little more time to account for his actions. Yana, for his part, denied that he had broken election law and also apologized again for the remarks about withholding road funds that started the scandal.

The Liberal Democratic Party (LDP) has not necessarily abandoned Yana, though senior party officials have continued to emphasize that he needs to do more to take responsibility for his actions and provide a full explanation of what happened. Former prime minister Ishiba Shigeru, however, has sharpened his criticism of both Yana and Takaichi, condemning his attitude as “highly questionable” for someone involved in politics. With Takaichi expected to meet with Yana on Wednesday, 14 October following the budget committee hearing, his fate could be decided sooner rather than later. But the longer he remains, the greater the attention not just on his own conduct but on the LDP more broadly.

Takaichi questioned on tax cut funding

While the Yana scandal consumed significant oxygen Tuesday, the prime minister also faced questioning about the consumption tax cut bill that was submitted to the Diet last Friday.

Takaichi has encountered particularly insistent questioning on her government’s plans to fund the estimated JPY 5tn per year bill for the two-year tax cut on foodstuffs. She has repeatedly stated that the tax cut will not be funded by deficit bond issuance, but her government has avoided outlining plans for financing the tax cut until the FY2027 budget is drafted.

She alluded Tuesday to the possibility of using higher tax revenues or proceeds for currency intervention in the Foreign Exchange Fund Special Account (FEFSA) — both options that have been floated before — though it is unclear whether tapping the FEFSA for this purpose is strictly legal (or advisable).

Takaichi was also criticized for the government’s failure to provide details about how it intends to distribute additional payments to low-income households to compensate for the government’s decision to lower the tax to 1% instead of 0%.

The legislation’s path through the Diet is still uncertain as no opposition party has indicated its support. OKAMOTO Mitsunari [岡本三成], leader of Kōmeitō, reiterated Tuesday that while his party is open to discussions with the government on the bill’s provisions related to the refundable tax credit to be introduced in 2029, it is still opposed to the temporary consumption tax cut and therefore cannot support the legislation.

First post-scandal poll suggests Yana could cost Takaichi

NHK released its latest poll on 13 October, which showed a slight decline in the government’s net approval – down three points, to +19 – and suggested that the Yana scandal could be beginning to weigh on the government’s support. The NHK poll is the first poll in nine days and the first since the scandal emerged. The entrance of the NHK poll into my ten-day moving average, which since 8 October had only included a fairly favorable JNN poll, brings the government’s weighted average support down to +21 (+19 adjusted for pollster bias).

The poll found that the public is relatively dissatisfied with the new cabinet lineup – 42% strongly (4) or somewhat (38%) in favor, 48% strongly (15%) or somewhat (33%) opposed – and overwhelmingly dissatisfied with Yana’s response to the allegations thus far. Only 8% said that they were persuaded by his comments, while 78% said that they were not.

Meanwhile, the poll also recorded one of the more negative findings about the consumption tax cut that I have seen, with only 38% in favor and 44% opposed.

While government supporters back the proposal by a 51% to 35% margin, independents oppose the tax cut by sizable margin, with 50% opposed and only 31% in favor. Support is polarized by age, with voters under 40 the most favorable (56% support); voters in their forties are slightly in favor (47% support to 44% oppose) and voters in their fifties are barely in favor (45% to 44%).

Voters over 60, who have the most to lose from cutting a tax that generates revenue earmarked for social security, are firmly opposed. Finally, 78% of respondents said that they are greatly (34%) or somewhat (44%) affected by rising prices.

Japan Inc. Now Sells No Yen to Invest Abroad

Earnings on Japan’s foreign direct investment (FDI) reached 103% of new FDI in 2022–25. With dividends and retained earnings counted together, Japan Inc. now needs to sell little yen to invest abroad.

[by OKUBO Takuji]

Key takeaways

Foreign affiliates now earn about as much as Japan invests abroad each year. Reinvested earnings, dividends and interest together reached 103% of new outward FDI in 2022–25, against 48% in 1996–2000.
Dividends from foreign affiliates account for a growing share of Japanese corporate profit. We estimate that foreign affiliates contributed 13.4% of Japan Inc.’s earnings in FY2025, up from 1.7% in FY1996.
Corporate investment abroad now involves little net yen selling. After dividends and interest paid home, the estimated outflow has been close to zero since 2022, down from about ¥5 trillion a year, or about 1% of GDP, on average in the 2010s.

Japan’s FDI stock now earns 103% of new investment

It is often said that Japan’s ageing population and slow growth give its companies too few investment opportunities at home. A Japanese government report in 2024 included the following passages.

“Japan’s ageing and shrinking population depresses expected demand at home. Expected returns remain higher abroad, so Japanese companies have accelerated outward direct investment” (my translation). — MATSUBAYASHI Yōichi [松林洋一], MOF PRI, chapter 8, p.136.

“Companies invested abroad because they saw no promising investments in Japan; they are unlikely to bring back every return. On a cash-flow basis, the external balance is in deficit and is one factor behind the weak yen” (my translation). — KARAKAMA Daisuke [唐鎌大輔], MOF PRI, chapter 10, pp.178 and 175.

However, my review of recent data shows that while their premise of low growth prospects in Japan is probably still right, the direct investment Japan has accumulated abroad has reached a level where it earns enough to cover Japan’s new investment abroad. This changes the exchange-rate implication even if Japan keeps investing abroad.

As chart 1 shows, earnings on the accumulated investment stock rose from 48% of new outward FDI in 1996–2000 to 103% in 2022–25.

Chart 1

Overseas affiliates pay interest and dividends to their parent companies in Japan. Those dividends have become a sizable part of corporate Japan’s income: we estimate that they made up 13.4% of Japanese corporate profit in FY2025, up from 1.7% in FY1996.

When foreign affiliates retain their earnings on their balance sheets, Japan’s balance of payments statistics record them as FDI from Japan, even though no money crosses the border. While the companies receiving FDI dividends and the companies paying for new FDI are not necessarily the same, Japan Inc. as a whole is now financing its FDI almost entirely from the earnings of its overseas affiliates. At the current level of FDI, little new yen needs to be converted into foreign currencies as Japan goes about investing abroad.

In the rest of this report, I explain how foreign direct investment by Japanese companies evolved, and its near-term outlook. This report is the third in a series on the yen repatriation theme that I have published over the past few weeks, following “Yen Repatriation Starts with the Whale”, on capital flows through Japan’s national pension funds, and “Mrs Watanabe No More”, on Japanese households’ assets invested abroad.

A strong yen helped drive Japan’s first outward FDI boom

Japan’s outward investment was heavily restricted after WWII, requiring case-by-case permission from the government. Approvals became more and more automatic over the years until outward investment became “free in principle” in 1980. Trade friction with the US-led Japanese carmakers to restrain their exports from 1981, pushing them to build factories abroad. The rapid appreciation of the yen was also a factor. The yen strengthened from ¥242 per dollar before the Plaza Accord in September 1985 to ¥121 by the end of 1987. Japanese producers had to move lower value-added work abroad. The strong yen also gave Japanese financial institutions sizable purchasing power for a while, until the stock and property bubbles burst in 1990 and 1991.

All of these factors contributed to a rapid increase in outward FDI through the 1980s and 1990s (chart 2).

Chart 2

Even after the bubble burst, the strong yen kept pushing manufacturers to move abroad. In 2005, manufacturers accounted for 60% of the FDI stock. As Japanese manufacturers expanded their supply chains abroad, Asia’s share of outward FDI rose from about 12% in FY1986–90 to 19% in FY1995–99, and Asia held 23% of the FDI stock by 2005 (chart 3).

Chart 3

Japan’s outward FDI stock rose to 56% of GDP

The next phase was sustained by a different pressure. With weak growth and low interest rates at home, Japan Inc. kept investing abroad, across a broader range of industries. Between 1995 and 2025, the stock of FDI rose from 9% of Japan’s GDP to 58% (chart 4). In 2025, it is as large as about 38% of the private sector’s domestic fixed capital, on our estimate.

Chart 4

By industry composition and by destination compositions changed over time. Manufacturing’s share of the FDI stock had fallen to 37% by 2025, giving Japan’s FDI more breadth. By destination, we are seeing a revival of FDI toward the United States. It accounted for 34% of the stock in 2025, Europe 29% and Asia 25% (see earlier chart 3).

Thus, after decades of overseas investment, Japan’s FDI stock is now large enough that its earnings are sufficient to finance new investment abroad, at least for now. In the next section, I consider whether this will continue, and in particular whether Japanese companies may bring an even larger share of their overseas earnings back to Japan, given the weak yen, higher borrowing costs in yen and possibly better investment opportunities at home.

The weak yen has slowed offshoring, not reversed it

The real depreciation of the yen over the past 15 years made production in Japan more competitive. There is some evidence that manufacturers are considering bringing production back to Japan. The 2023 manufacturing white paper found more firms shifting production back from China than moving there, and they named the weak yen as one reason. We see some signs of reshoring. Japanese manufacturers’ overseas production ratio rose from 18.0% in FY2011 to 27.2% in FY2023, but it may have started to decline or at least stabilize. The ratio fell to 26.7% in FY2024. A Cabinet Office survey of listed manufacturers puts the ratio at 24.5% in FY2025, and their plan for FY2030 is broadly unchanged at 24.7%. The weak yen seems to have stabilized the wave of offshoring, but I see no firm evidence of a move back onshore yet.

Domestic investment has grown slowly despite the weak yen

There are tentative signs that domestic capital spending is starting to grow again. For three decades it grew at a very low speed. In real terms, private business investment rose only 26% between FY1997 and FY2025, less than 1% a year. In comparison, capital spending grew by about 4% a year on average in the United States. In my view, a weak currency is only one of the factors manufacturers weigh in designing their global production chains. The weak yen makes production in Japan competitive today, but they have also seen the exchange rate swing violently within short periods. Japan also has a shrinking population problem. It started to address it by opening a door to immigration, but the door is only tentatively open. Overall, my view is that the weak yen alone is unlikely to give Japan Inc. sufficient incentive to bring its capital back to Japan and to the yen.

Economic security is bringing some production home

The government is pushing harder than the currency, mostly in the name of economic security, even before the Takaichi government came along. The government currently has a ¥250 trillion domestic investment target for FY2040 and named AI and semiconductors among its 17 strategic fields. Semiconductors are where the money has gone furthest. In November 2024, under the Ishiba government, Japan committed more than ¥10 trillion of public support to AI and semiconductors by FY2030, aiming to draw more than ¥50 trillion of public and private investment over ten years. Japan managed to lure a TSMC plant to Japan, backed by a sizable subsidy. Rapidus, a government-supported Japanese semiconductor maker, has received a sizable subsidy and is building a factory in Hokkaido. Japan’s production of integrated circuits and discrete semiconductors rose from ¥2.7 trillion in 2019 to ¥4.1 trillion in 2025.

Under the name of economic security, the Japanese government is promoting other industries such as batteries, shipbuilding and pharmaceuticals. Defence spending adds to the push. Japan’s defence budget rose from about ¥5 trillion in FY2022 to ¥9.0 trillion in FY2026. Some defence contractors, such as Mitsubishi Heavy Industries, have doubled their defence revenue.

Japan’s industrial-policy record gives reason for caution

The Japanese government and the Ministry of Economy, Trade and Industry (METI), the key agency behind Japan’s industry policy, may claim some expertise in their industrial policies. Empirical studies in the past paint a poor track record, though. Rapidus, the most ambitious semiconductor project, has had no independent cost-benefit assessment (Negrine et al., 2025). While defence and economic security-driven policies have a different logic, I doubt that these industrial policies will succeed in bringing large-scale manufacturing investment back to Japan so long as macro factors such as Japan’s demography remain unfavourable.

FDI no longer appears to drive yen weakness

The weak yen and non-economic geopolitical factors do point to a halt in Japan’s four-decade offshoring trend, although it is a stabilization, rather than an economy-wide reversal of past offshoring. Japan Inc. will continue to invest more abroad, rather than within its borders. Given the sizable growth in the stock of cumulative FDI, Japan Inc. no longer needs to convert yen into overseas currency to keep investing abroad though. Net of dividends and interest paid home, Japan’s FDI sold about ¥5 trillion of yen a year, or about 1% of GDP, on average in the 2010s; since 2022 the net flow has been close to zero. There is also an interesting development in an effort to allow more share-exchange based M&A for cross-border deals that will further reduce the need for Japanese companies to spend their yen to purchase overseas assets. In my view, Japan Inc.’s FDI is no longer a factor to drive the yen weaker.

References

Negrine, Joseph, Christopher Findlay and Shiro Armstrong (2025), “Chips in Japan: Industrial policy, decline and renewal”, RIETI Discussion Paper 25-E-116.
Porter, Michael E. and Mariko Sakakibara (2004), “Competition in Japan”, Journal of Economic Perspectives 18(1): 27–50.
Ministry of Finance Policy Research Institute, “Structural changes in the Japanese Economy and its capital flow” (2024), chapters 8 and 10.

Japan-Watching: Yen Repatriation Starts with the Whale

GPIF, one of the largest national pension funds in the world, is likely to rebalance its assets from non-yen bonds to yen bonds, signaling a big turn in Japan’s cross-border capital flows.

[from Japan Macro Advisors, 10 September, 2026]

Key takeaways

In 2013, GPIF’s investment committee, chaired by UEDA Kazuo [植田和男], now the BoJ governor, saw a fair chance of a JGB crash within five to ten years. Its CEO priced the crash as the 10-year rising from 0.5% to 3%. Subsequently, GPIF cut its target weight for domestic bonds from 60% to 25% as an emergency measure against abnormally low yields.
The 10-year is now at 3%. On my replication of GPIF’s own allocation rule, a real return on JGBs near zero points to a 50% weight in domestic bonds, against 25% today. I expect GPIF to raise the weight, if it has not already started in the September quarter.
How GPIF decides its asset allocation and communicates it publicly is a very delicate and political issue. But regardless of how it communicates it, a change in asset allocation is inevitable. In my view, it signifies a big turn in Japan’s cross-border capital flows.

Japan has one of the Largest Pension Funds in the World

Japan has the second largest public pension fund in the world. Norway’s is the biggest, although it is not strictly a pension fund. Canada’s pension funds, when all eight of its variants are added together, come a close third.

Japan set up its first national pension fund in 1961 and it has since gone through various reforms and reorganization over the last 65 years. Its current form is called the Government Pension Investment Fund (GPIF). As explained in a later section, GPIF has a few siblings, and when we add them together, Japan’s public pension funds can be said to be the largest in the world.

Chart 1

GPIF used to invest most of its asset into JGBs

GPIF used to invest the majority of its fund as loans to the national government and into Japanese government bonds (JGBs). At the end of FY2012, 62% of its assets consisted of domestic bonds. However, in 2014 it went through a radical asset reallocation and the target weight for domestic bonds was reduced from 60% to 35%, and then further down to 25% in 2020. Its current target allocation is a clean four-way 25% split into domestic bonds, domestic equity, foreign equity and foreign bonds.

As one of the largest pension funds in the world, its asset allocations attract market attention and there is speculation that it is about to raise its allocation into domestic bonds. In my view, there is indeed a very high chance that GPIF will be raising its allocation into domestic bonds, if it has not already started to do so in the current quarter ending in September 2026.

Chart 2

UEDA in 2013 Saw a Bond Crash Coming

To understand why GPIF is highly likely to raise its allocation into domestic bonds, we need to go back in history to 2013. Why 2013? Of course, it is the year the Bank of Japan (BoJ) started its massive quantitative easing. The 10-year JGB yield started 2013 at 0.8% and it fell to 0.3% by the end of 2015 before briefly hitting a negative rate of -0.3% in 2016. If you were the chairperson of the GPIF investment committee, you would have been concerned about the wisdom of continuing to invest in JGBs at such a policy-driven low rate. The actual chairperson was UEDA Kazuo [植田和男], the current BoJ governor. In the minutes for October 2013, UEDA said, “I think there is a fair chance that bonds will crash at some point in the next five to ten years [unofficial translation].”

The minutes were released only seven years later; otherwise the use of the word “crash” would have been controversial.

GPIF CEO Priced the Crash at 3% in 2014. We Are There Now

If you read through the GPIF minutes between 2013 and 2014, you would see that GPIF officials were increasingly conscious of the precariousness of investing in JGBs. Long story short, as this process was highly political and a sensitive subject, they decided to radically lower the target allocation weight for JGBs to 35% in 2014, presented it as the result of a philosophical change in the way GPIF is managed and how the concept of “risk” should be considered. Investment in JGBs was no longer considered low risk in real terms. The asset allocation for domestic bonds was further lowered to 25% in 2020. The following is what MITANI Takahiro [三谷隆博], the GPIF CEO at the time and an ex-BoJ senior official, said in the October 2014 GPIF minutes.

“Yields are just under 0.5% now, so a move to near 3% would mean a loss of about ¥25 trillion. (…). So I think the clearest way to explain it is that reducing the weight on JGBs to some degree is simply unavoidable [unofficial translation]”

The 2014 cut in the weight was partly an emergency escape

As I wrote earlier, the radical asset reallocation in 2014 was part a shift in the concept of risk from “nominal” to “real”, so that JGB is no longer risk free assets. But the change was also at least partly an emergency measure to escape the abnormally low-yield environment. Then the next natural question is, now that the JGB yields are no longer abnormally low, what should happen to its asset allocation? Pensions are paid in yen, so long-duration Japanese government bonds are a natural match, while GPIF should also be holding some non-yen assets and equities to diversify its assets and protect the overall balance sheet from inflation. In the next section, I will show you a simplified replication of how GPIF decides its asset allocation and what GPIF’s asset allocation could be now that JGB yields are normal.

How GPIF decides its weights

Put simply, GPIF’s target weights are the output of an optimizer with a few rules. Find the portfolio that, at the required real return, has the smallest average shortfall below wage growth in the years when it falls short, and round it to the nearest 5%.

When GPIF last decided to keep the current 25% weight for domestic bonds in 2025, JGBs were assumed to produce a nominal return of 0.5% against wage growth of 1.3%, so a real return of minus 0.8%. Exhibit 1 shows a simplified matrix of weights depending on expected nominal return on bonds and wage growth. The red box shows the assumption behind the 2025 weights decision mentioned above. If we use a higher wage growth assumption of 2.3%, an expected nominal return of 1.8% on bonds gives a weight of 35%. GPIF’s bond portfolio has an average maturity around 10 years, and the 10-year bond is yielding 3% now. A lot of thought and estimation is needed to form a view on the expected real return on domestic bonds, but in my view, it is clear that the minus 0.8% used in their last review is too low given where bond yields are.

Why GPIF kept the weight in 2025 and why circumstances changed

In late 2024 when the GPIF was reviewing the weight as part of its five-year plan, the BoJ was already in the process of exiting from QE and raising its policy rate. However, the JGB market was still in the process of adjustment and bond yields had a lot of room to rise. For example, the 10-year yield was 0.89% at the end of September 2024, rose to 2% by the end of 2025 and now, in September 2026, stands at 3%. You can understand why GPIF decided to keep its weight on domestic bonds unchanged as it would have incurred capital losses on bond purchases in 2025. But in my view, as I wrote in the report “The Long Climb in JGB Yields Is Nearly Over” [archived PDF], long bond yields are getting closer to a stability point. If the GPIF board shares my view, it is a good time to think about raising its target weight into domestic yen bonds.

The Whale Problem and the Washington Problem

How high should the new weight be for domestic bonds? The reality of determining appropriate weights and how to announce it is a lot harder than the simplified model I explained above. Other than forming a reasonable view on the expected real return on asset classes, there are a few factors that complicate the process.

Firstly, GPIF needs to think about how such an announcement would affect the market. GPIF is what financial market professionals call a whale, a massive investor whose investment decisions sway market prices. There is also a related argument that given the dominance of GPIF in the domestic market, GPIF should be increasing its asset weight abroad to reduce its impact on domestic asset markets.

Secondly, changing asset allocation weights carries political considerations. If GPIF decides to raise the target weight for domestic bonds, foreign bonds are the likely asset class whose weight will go down. More than 50% of its foreign bonds are in US dollars. With all the news circulating in the market now, Scott Bessent will not like a public announcement that one of the largest pension funds in the world is reducing its purchase of US treasuries. There are domestic political considerations as well, as the Takaichi government contemplates how best to fund its deficits.

These are the issues GPIF officials must be debating. How GPIF decides its asset allocation in the near future will be a revealing case study for those who want to study how policy-making works in Japan. Those who are interested in this topic should read the transcripts of an interesting government committee in 2014 that focused on how GPIF could shield itself from political meddling. Guess who chaired the committee? UEDA Kazuo [植田和男].

Whatever the near-term decision GPIF makes regarding its target weight, I think it is fairly clear that GPIF should be increasing its investment into domestic bonds. The following table shows how much GPIF could buy in net terms, depending on the eventual rise in the target weight.

How much GPIF buys: ¥32tn at 35%, ¥80tn at 50%

Domestic Bond Target	GPIF Buys	With the Sister Funds
30%	¥16tn	¥20tn
35%	¥32tn	¥20tn
40%	¥48tn	¥20tn
50%	¥80tn	¥20tn

Additional domestic-bond holdings from re-weighting the fund at 30 June 2026 (managed assets ·317.8tn). Foreign bonds sold first.
Source: GPIF, JMA.

Three things in this table matter for the market. GPIF is allowed to deviate its asset allocation by six points either side of 25% without any announcement, so 39% target is already possible without any public announcement. In 2014 GPIF moved inside its band first and announced the new portfolio afterwards, and I would expect the same sequence this time. Second, these are static figures, which do not account for the growth of the fund over time.

The sister funds move with the whale

As mentioned earlier, GPIF has a few siblings. The Pension Fund Association for Local Government Officials (¥35.5tn), the Federation of National Public Service Personnel Mutual Aid Associations, known as KKR (¥11.5tn), and the Promotion and Mutual Aid Corporation for Private Schools of Japan (¥4.9tn) manage the pension reserves of local government employees, national government employees and private-school teachers. These sisters run their funds on the same 25/25/25/25 model, and with the legacy reserves they also run, they hold a further ¥87tn on top of GPIF’s.

Conclusion

GPIF cut its domestic bond weight from 60% to 35% in 2014, and later to 25%, to safeguard its assets from the manipulated low JGB yields at the time and the eventual crash they foresaw. That crash, as GPIF’s CEO MITANI defined it in 2014, has now happened with the 10-year yield rising to 3%. In my view, JGB yields have largely normalized and there is no emergency reason to avoid domestic bonds. It is only natural that GPIF would raise its allocation into domestic bonds, although how GPIF communicates this publicly is a touchy issue they need to figure out. When GPIF raises its domestic bond allocation, foreign bonds are the likely asset class to take the hit. GPIF publishes quarterly results and the next publication for the end-September 2026 quarter, expected in early November 2026, will be closely watched. Judging from market movements in the last few weeks, the market has started to sense that what I described in this article is already happening and Japanese money is starting to come back to the yen. While it should be characterized as rebalancing, rather than a repatriation, it seems we are observing a big turn in Japanese cross-border capital flows.

Japan-Watching: Ministry of Foreign Affairs of Japan

First Meeting of the Study Group on Strengthening Japan-Africa Economic Partnership

At TICAD 9 held last August, Mr. ISHIBA Shigeru (石破茂), then Prime Minister of Japan, announced the establishment of the “Study Group on Strengthening Japan–Africa Economic Partnership” as one of the concrete initiatives of the Japanese Government’s policy on Africa. The first meeting of this study group is scheduled for June 18 in a hybrid format.

Under the framework of a “Free and Open Indo-Pacific (FOIP)”, this study group will address African economic integration, a top priority for the African Union (AU). Through strengthening economic cooperation between Japan and Africa, the study group aims to support business expansion of Japanese companies in the African market. To this end, the study group will discuss various topics including measures to promote regional economic integration in Africa, review of trade and investment between Japan and Africa, and the strengthening of economic relations between Japan and Africa. The study group will prepare a report by the end of the fiscal year 2027, which will be submitted to the Minister for Foreign Affairs.

(Reference 1) Japanese Members

Prof. WATANABE Yorizumi (渡邊頼純), Professor Emeritus, Keio University; Dr. KIMURA Fukunari (木村福成), President, JETRO Asian Economic Research Institute; Mr. FUJITA Ryoji (藤田亮二), Executive Officer, Toyota Tsusho Corporation (Representative from Keidanren); WATANABE Tatsuro (渡邉達郎), Managing Executive Officer, Mitsui O.S.K. Lines (Representative from Keizai Doyukai); IGARASHI Katsuya (五十嵐克也), Director and Head of International Department, the Japan Chamber of Commerce and Industry; and representatives from the Ministry of Foreign Affairs, Ministry of Finance, Ministry of Agriculture, Forestry and Fisheries, and Ministry of Economy, Trade and Industry.

(Reference 2) African Members

Mr. Lacina Koné, Director General and CEO, Smart Africa Alliance; Mr. Kulekani Mathe, CEO, Business Unity South Africa (BUSA); Dr. E. Olawale Ogunkola, Professor of Economics, University of Ibadan, Nigeria; and representatives from the United Nations Economic Commission for Africa (UNECA), the African Continental Free Trade Area (AfCFTA) Secretariat, and the African Union Commission (AUC).

(Note) In addition, relevant Ministries, agencies, and individuals with expertise are expected to attend depending on the agenda.

(Reference 3) Attachment

Establishment of the Study Group on Strengthening Japan-Africa Economic Partnership [Archived PDF]

G7 Evian Summit

Working Session on “Reviving a Balanced, Shared and Sustainable Economic Growth”

On June 17, commencing at 10:30 a.m. (local time. 5:30 p.m. on June 17, Japan time.) for approximately 120 minutes, Ms. TAKAICHI Sanae (高市早苗), Prime Minister of Japan, attended the G7 Evian Summit Working Session on “Reviving balanced, inclusive, and sustainable economic growth for the benefit of all”. The overview of the session is as follows.

Prime Minister TAKAICHI stated that the G7 and like-minded countries should maintain close communication to reduce uncertainty in the global economy.
Prime Minister TAKAICHI also stated that it is a common challenge for many countries to promote self-sustaining growth, by addressing non-market policies and practices (NMPPs) and the resulting excess capacity which are drivers of widening global imbalances.
Furthermore, Prime Minister TAKAICHI stated that G7 members and the countries participating in this session should also demonstrate their contribution to reducing imbalances for their own balanced growth as well as for the stability of the global economy and financial markets. Prime Minister TAKAICHI added that making use of data-driven, objective analyses and policy advice by the IMF and the OECD is extremely beneficial in advancing these efforts.
Prime Minister TAKAICHI expressed her hope that the G7 and like-minded countries would lead the global economy through frank discussions. She also stated that she looked forward to discussions at the G20, chaired by President Donald Trump of the United States, on reducing uncertainty in the global economy and becoming stronger and more prosperous together.

Situation in Iran (Signing of a Memorandum of Understanding between the United States and Iran)

(Message from Foreign Minister MOTEGI Toshimitsu [茂木敏充])

On June 18 (Japan Standard Time), the United States and Iran signed a Memorandum of Understanding and the cessation of hostilities was declared. Japan once again welcomes the fruition of the diplomatic efforts made by the parties as well as the countries that played a role in mediation.

Hereafter, it is important that free and safe navigation through the Strait of Hormuz is swiftly reestablished through the steady implementation of this MoU by all parties. Japan also considers it of critical importance that vessels be able to transit the Strait of Hormuz without being subject to additional costs, as has been the case thus far.

Japan strongly hopes that a final agreement on matters such as Iran’s nuclear issue will be achieved as soon as possible through further negotiations between the United States and Iran. Japan will also support the peaceful resolution of the Iranian nuclear issue including through coordination with the International Atomic Energy Agency (IAEA).

After the conclusion of a final agreement, Japan intends to play an active role in the reconstruction and recovery of the region. Japan will also continue to make every diplomatic effort, in close coordination with the international community, toward the realization of peace and stability throughout the Middle East region.

Parliamentary Vice-Minister for Foreign Affairs ERI’s Visit to the United States

From June 21 to June 24, Ms. ERI Arfiya (英利アルフィヤ), Parliamentary Vice-Minister for Foreign Affairs of Japan, will visit New York, United States.

During her visit, Parliamentary Vice-Minister ERI will attend the United Nations General Assembly High-Level Meeting on HIV/AIDS and deliver a statement in the meeting. She will also hold meetings with representatives of international organizations.

(Reference) Schedule

June 21	Departure from Tokyo
	Arrival at New York
June 22	Participation in the United Nations General Assembly High-Level Meeting on HIV/AIDS, etc.
June 23	Meetings with representatives of international organizations, etc.
	Departure from New York
June 24	Arrival at Tokyo

The 7th Japan-Australia Cyber Policy Dialogue

On June 18, the 7th Japan–Australia Cyber Policy Dialogue was held in Tokyo, Japan.

This whole-of-government meeting was co-chaired by Mr. MIYAKE Fumito (三宅史人), Ambassador in charge of Cyber Policy and Deputy Director-General of the Foreign Policy Bureau, Ministry of Foreign Affairs (MOFA) of Japan, and Ms. Jessica Hunter, Ambassador for Cyber Affairs and Critical Technology, Department of Foreign Affairs and Trade (DFAT), Australia, with the participation of officials from, on the Japanese side, MOFA, National Cybersecurity Office (NCO), National Police Agency (NPA), Ministry of Defense (MOD), Ministry of Internal Affairs and Communications (MIC) and Ministry of Economy, Trade and Industry (METI), and on the Australian side, DFAT, Department of Industry and Australian Signals Directorate (ASD)’s Australian Cyber Security Centre (ACSC) and Department of Home Affairs (DHA).
At this dialogue, following the enactment of Japan’s Cyber Response Capability Strengthening Act and Necessary Arrangement of Relevant Acts last year, as well as the adoption of its new Cybersecurity Strategy, the two sides exchanged views on broad range of topics, such as each country’s respective cybersecurity strategy and policy, and cooperation at both the bilateral and multilateral levels.
Furthermore, building on the “Japan–Australia Strategic Cyber Partnership” which Ms. TAKAICHI Sanae (高市早苗), Prime Minister of Japan and the Hon. Anthony Albanese, Prime Minister of Australia concurred on launching at the Japan–Australia Summit Meeting in May of this year, the two sides exchanged views on efforts and cooperation in a wide range of areas including the defense and deterrence of cyber threats, capacity-building, public-private partnerships, and artificial intelligence (AI) and cybersecurity.
Both sides confirmed that they will continue to work closely together in the field of cyber, including through the Japan–Australia Cyber Policy Dialogue.

[from the Ministry of Foreign Affairs of Japan, 18-19 June, 2026]

Stablecoins and Financial Stability

The United States has introduced a new stablecoin regulatory framework, but concerns over the cryptocurrency’s place in the global economy remain.

[from the Federal Reserve Bank of Richmond’s Econ Focus, Fourth Quarter 2025, by Matthew Wells]

Signed into law in July 2025, the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act was a huge step forward for the cryptocurrency industry. The bipartisan legislation marked the federal government’s first effort at creating a regulatory framework for cryptocurrencies and signaled that crypto had finally achieved a status and size worthy of the government’s attention.

Stablecoins are digital assets used primarily as currency to buy and sell other cryptocurrencies, such as bitcoin, on blockchains, which are decentralized electronic ledgers. Traditionally, they are viewed as “private money” that has been pegged one-to-one to a state-issued currency, typically the U.S. dollar, although others have been pegged to the euro, the Japanese yen, and the Swiss franc.

While few people use stablecoins to pay for conventional goods and services, the technology is expanding rapidly. The SWIFT payment system is transitioning to the blockchain, allowing banks to settle transactions with stablecoins, and large companies such as PayPal have developed their own stablecoins. Walmart, Amazon, and several large financial institutions are also exploring their potential.

The GENIUS Act gives banking regulators, including the Federal Reserve, oversight authority over the entities that issue stablecoins. However, the law leaves it to those regulators to decide what rules to create and how to implement them. Further, increases in stablecoin demand may impact other sectors of the economy, such as the Treasury market and the global demand for dollars. All these carry potential implications for the stability of stablecoins, as well as the Fed’s efforts to maintain a safe and secure financial system.

Stablecoin Fundamentals

Customers wanting stablecoins pay money through their bank accounts, credit or debit cards, or other payment systems to an entity issuing them. With those stablecoins in hand, users can make purchases or investments wherever they are accepted. When users want to “cash in,” they take whatever stablecoins they have, which could have increased or decreased in number, back to an issuer, where they collect dollars back at a one-to-one rate.

Two of the most popular stablecoins in the crypto space are Tether and USD Coin. Unlike dollars, which are fiat currency (that is, their value is derived from the government’s declaration of their value), they and other stablecoins are backed or collateralized by a range of assets (or reserves), especially cash or U.S. Treasurys. In theory, these reserves can be easily liquidated to pay any customer seeking to redeem stablecoins for dollars.

The GENIUS Act addresses these dollar-pegged and reserve–collateralized stablecoins specifically, but there are other types of stablecoins that fall outside of the act’s definition. Crypto–collateralized stablecoins, for example, are still pegged to a currency but are backed by other digital assets such as Ethereum, making them less stable because of the greater volatility of their reserves. Another example includes algorithmic stablecoins, which attempt to maintain a consistent dollar-pegged value through automated adjustments in value relative to other digital currencies.

Stablecoins are used primarily as an immediate and secure medium of exchange for blockchain-based transactions, particularly the buying and selling of other cryptocurrencies. Unlike traditional payment systems, which can take days to fully settle transactions, stablecoin transactions are settled at any time of day on the blockchain almost instantaneously through “smart contracts,” where the terms of the transaction are written into the code.

Beyond their speed on the blockchain, another benefit of stablecoins is their global reach. They can be used anywhere in the world, including areas where dollars are difficult to acquire. Coupled with the ease with which a user can move stablecoins in and out of crypto markets, their use can reduce the costs and frictions associated with remittances or other international transactions. For individuals in developing countries with persistently high inflation, stablecoins may also be a way to save money that is insulated from swings in the domestic currency.

In a February 2025 speech [archived PDF], Fed Gov. Christopher Waller similarly noted that for some users, stablecoins might also serve as a store of value. Relative to the other, more volatile crypto assets, stablecoins are low risk, “which allows traders to move out of risky positions into safe ones where the safe asset price is known and stable,” he argued. Most stablecoin transactions — more than 80 percent — occur outside of the United States.

To date, these benefits of speed and availability have mostly been enjoyed by individuals active in the cryptocurrency marketplace rather than the average consumer. According to the Fed’s most recent Diary of Consumer Payment Choice [archived PDF], only 3 percent of respondents said they used cryptocurrency as a form of payment in the last month. However, the annual transaction value of stablecoins exceeded $27 trillion in 2024, surpassing that of Visa and Mastercard combined. Further, stablecoins’ current market capitalization is about $267 billion, and Citigroup projects it will grow to between $1.9 trillion and $4 trillion by 2030. Treasury Secretary Scott Bessent made a similar claim in November, suggesting it could reach $3 trillion in the coming years. Motivated by that growth, and its potential implications for the economy, Congress passed the GENIUS Act.

A New Regulatory Framework

The GENIUS Act grants banks, nonbanks, and even nonfinancial institutions with approval from state or federal regulators the ability to issue stablecoins to the public. Under the act, the Office of the Comptroller of the Currency regulates federally qualified issuers with over $10 billion in stablecoins in circulation. If the issuer is a subsidiary of an insured depository institution, such as a bank, it is regulated by the appropriate federal banking agency. All issuers with less than $10 billion in circulation would be regulated at the state level. Regulators would be responsible for conducting annual audit and ensuring compliance with existing anti-money laundering and sanctions requirements.

Crucially, issuers would be required to hold at least one dollar’s worth of reserves for every stablecoin issued. Those reserves mostly come in the form of cash, insured and uninsured deposits, short-term Treasurys, repo agreements, and central bank reserve deposits. However, these issuers would be exempt from the regulatory capital requirements that currently apply to banks, and this holds true even if the issuers are banks engaged in regular banking activities.

Stablecoins are not defined as securities or commodities under the legislation, meaning they are not federally insured and do not have the same protections as traditional bank deposits. In other words, there is no government-backed guarantee a user would be able to get cash back when they want to trade back in their stablecoins. Issuers, as of now, also do not have access to the Fed’s lending facilities.

Proponents of stablecoins argue that government insurance and access to the Fed are not necessary because the assets designated as collateral by the GENIUS Act are highly liquid, and issuers are required to hold as many dollars in reserve as they have stablecoins in circulation. While this would seemingly guarantee stablecoin holders could redeem their coins for cash whenever they choose without any difficulty, not all policymakers or observers agree it would be that easy.

In an October 2025 speech [archived PDF], Fed Gov. Michael Barr argued that “Because stablecoins are not backed by deposit insurance and stablecoin issuers do not have access to central bank liquidity, the quality and liquidity of their reserve assets is critical to their long-run viability.”

He identified several points of vulnerability in those assets. In addition to the potential for some consumers to mistakenly assume all stablecoins — not just those covered by the GENIUS Act — carry the same level of stability, he pointed out that other dollar-pegged assets have not always been able to maintain that one-to-one value. Money market mutual funds, which are listed as one class of asset that can be used as collateral, “broke the buck” in 2008 following Lehman Brothers’ bankruptcy and experienced strains again in March 2020 at the outbreak of the COVID-19 pandemic.

Uninsured deposits, another acceptable reserve asset, were also a risk factor that precipitated the March 2023 banking stress associated with the failure of Silicon Valley Bank and others. The legislation also allows for any medium of exchange authorized by a foreign government to be used as collateral via repo agreements, which until recently in the case of El Salvador included the highly volatile bitcoin.

In an October 2025 speech, Fed Gov. Michael Barr argued that “Because stablecoins are not backed by deposit insurance and stablecoin issuers do not have access to central bank liquidity, the quality and liquidity of their reserve assets is critical to their long-run viability.”

The GENIUS Act prohibits issuers from paying out interest to individuals holding their stablecoins. If stablecoins paid interest, they would have to be treated — and regulated — like securities rather than simply forms of payment. The legislation does, however, allow stablecoin exchanges, known as Virtual Asset Service Providers, to offer “rewards” to users who choose to buy and sell cryptocurrencies or conduct other transactions on their platforms. This creates a potential loophole, as these exchanges, if authorized by regulators, can also be part of the same entity issuing a stablecoin. The platform/issuer can then use the dollars traded for the stablecoins to purchase other assets, likely Treasurys to back the stablecoins, and then pay out rewards to customers with the proceeds from those investments.

Barr noted this area of concern, suggesting issuers “have a high incentive to maximize the return on their reserve assets by extending the risk spectrum as far out as possible. Stretching the boundaries of permissible reserve assets can increase profits in good times but risks a crack in confidence during inevitable bouts of market stress.” To hedge against this possibility, stablecoin issuers are required to publish monthly reports on the composition of their reserve assets, a move intended to give stablecoin holders increased confidence in the issuer’s liquidity.

Parallels to the Free Banking Era

Barr’s argument implies that stablecoins are only as stable as the assets backing them. The United States first established a banking system with a national currency backed by Treasury bonds during the Civil War. Prior to that, in the free banking era from 1836 to 1863, states conducted banking supervision and regulation, and banks issued their own currencies. (See “When Banking Was ‘Free,’” [archived PDF] Econ Focus, First Quarter 2018.) Those paper notes had to be collateralized through state and federal government bonds, and capital and reserve requirements were inconsistent across states.

This meant the country’s economy operated with competing, private currencies. It was difficult for currencies in one part of the country to be redeemed in other parts, and it was often done at a discount; for example, the farther away from the bank issuing the note, the steeper the redemption discount. It wasn’t unusual for citizens to question the collateral backing the various banks’ notes, leading to regular bank runs and failures.

One can draw parallels between the free banking period and today’s stablecoin landscape. First, as of early June, there were 233 stablecoins available on the crypto market. Numerous digital service platforms market themselves as spaces where private companies can create, manage, and distribute their own stablecoins. Bank of America, JPMorgan Chase, Citigroup, and Wells Fargo are considering the idea of a jointly issued stablecoin, as well as their own individual ones.

As was the problem with free banking, some economists question whether consumers will always maintain confidence that they can redeem stablecoins for cash on demand at the promised one-to-one rate. The large banks may be able to issue coins that no one will doubt, but the stablecoin marketplace includes platforms and issuers that are not banks at all, as well as international operators outside the jurisdiction of U.S. financial regulators.

“Smaller companies planning to issue stablecoins under the GENIUS Act to be regulated by one of the states may face market resistance,” says Michael Bordo, an economist at Rutgers University. “Unless there is perfect information about the backing and complete confidence in it, holders may want to discount the stablecoins or avoid them completely, as was the case under free banking in the United States.”

Yale University economist Gary Gorton expresses similar concerns, particularly due to the difficulty in regulating a transnational market. “Let’s suppose that one of the exchanges out there collapses because of fraud. Now everybody’s a little suspicious of these exchanges, and many aren’t even based in the United States,” he says. “That’s the kind of thing that would cause everybody to run.”

Should one stablecoin issuer experience a run where customers doubt its ability to pay back dollars on demand, it is possible others would too, especially if they are all backed by similar assets. This could lead to a crisis that extends beyond the stablecoin space and impacts the wider financial system. In a recent paper co-authored with Jeffery Zhang of the University of Michigan Law School, Gorton argued this outcome is consistent with the nature of short-term debt. Stablecoins are a form of that debt, and because of the laws of supply and demand, their values should fluctuate as the values of the assets backing them fluctuate.

“If one issuer gets in trouble and its stablecoin holders all run on it and ask for cash, it can sell Treasurys and give them the cash,” says Gorton. “But in a systemic event, 500 issuers are under siege and they all sell their Treasurys, and the price of Treasurys goes way down.”

Gorton and Zhang argued such a failure is in keeping with the pattern of systemic crises over the past 200 years, and the solution is not to outlaw stablecoins but to provide a safer alternative where “no one should have an incentive to produce information about the backing for the money (i.e., the banks’ assets); and everyone should know that no one has an incentive to produce that information.” In other words, a stablecoin that is truly stable is one that is accepted at par, anywhere and at any time, no questions asked. Gorton says that a digital currency issued by a central bank would meet these criteria.

Should one stablecoin issuer experience a run where customers doubt its ability to pay back dollars on demand, it is possible others would too, especially if they are all backed by similar assets. This could lead to a crisis that extends beyond the stablecoin space and impacts the wider financial system.

The Road Ahead

Skeptics and supporters alike agree that stablecoin adoption is likely to increase in the coming years. An important question, however, is whether it will attract new users looking for a new form of payment. Certainly, stablecoins offer the advantage of instant transactions, and merchants might have incentive to adopt them to replace credit cards, which currently assess transaction fees between 1.5 percent and 3.5 percent for each purchase. (See “Should Credit Card Fees Be Regulated?” [archived PDF]) However, it may be possible to achieve the benefits of quicker settlements and lower fees with existing payment rails, such as FedNow, raising the possibility that internal U.S. demand may be limited.

In a recent speech [archived PDF], Fed Gov. Stephen Miran acknowledged that stablecoins’ future growth may lie outside the United States. “Because GENIUS Act payment stablecoins do not offer yield and are not backed by federal deposit insurance, I see little prospect of funds broadly fleeing the domestic banking system,” he said. “The real opportunity in stablecoins is to satiate untapped foreign appetite for dollar assets from savers in jurisdictions where dollar access is limited.”

This increased global demand for stablecoins could precipitate increased demand for U.S. Treasurys. Stefan Jacewitz, an economist at the Kansas City Fed, suggested in a recent report that there is still a way to go for any increased adoption of stablecoins to make a meaningful difference in the economy. Circle, the largest U.S.-based stablecoin issuer, currently holds 43 percent of its assets in Treasurys. If all other issuers held that same percentage in Treasurys, it would amount to about $125 billion, which is less than 2 percent of the $6 trillion in outstanding Treasurys.

However, if the projections of increased adoption materialize, Jacewitz acknowledged the possibility that “it could lead to a substantial redistribution of funds” and potentially increase demand for Treasurys such that the increase in stablecoin issuers’ Treasury holdings could outpace the decrease in bank holdings. A 1 percent decrease in bank Treasury holdings — and an accompanying 1 percent decrease in bank lending — translates to a $325 billion reduction in loans into the economy, Jacewitz estimated.

The American Bankers Association and other banking organizations point to this potential for deposits to leave the banking system in calling for regulators to limit the ability of stablecoin issuers and platforms to pay out rewards. The crypto industry disagrees, arguing that banks fear competition, and banks could incentivize their depositors to stay by raising their deposit rate, something they did when they first competed with money market mutual funds.

While there is widespread agreement on the potential for stablecoins to serve an important function for cross-border transactions, concerns about their soundness and stability remain, and they are not just theoretical. Circle held $3.3 billion of its approximately $40 billion in reserves at Silicon Valley Bank when it collapsed in 2023, and its inability to access those reserves triggered a fall in the value of its USD Coin from the one-to-one ratio to below 87 cents on the dollar. In that case, the federal government stepped in and made whole all of Silicon Valley Bank’s depositors, including Circle, which restored its dollar peg.

Bordo argues that in the wake of the free banking era, it still took years of costly bank failures to get to the point where policymakers acted upon the realization that stability in the banking system required much more government intervention, supervision, and regulation than had existed. He notes, “There are always new entities that are going to figure out a way to be outside the regulatory net,” and stablecoins will not be any different.

As with any new financial innovation, the Fed will continue to study stablecoins to ensure that their benefits can be enjoyed by those who want to use them while maintaining overall financial and banking stability.

Readings

Gorton, Gary, and Jeffery Zhang. “Why Financial Crises Recur.” [archived PDF] University of Michigan Law and Economics Research Paper No. 24-069, June 25, 2025.

Jacewitz, Stefan. “Stablecoins Could Increase Treasury Demand, but Only by Reducing Demand for Other Assets.” [archived PDF] Economic Bulletin, Federal Reserve Bank of Kansas City, Aug. 8, 2025.

Spira, Jack, and David Wessel. “What Are Stablecoins, and How Are They Regulated?” [archived PDF] Brookings Commentary, Oct. 24, 2025.

“Stablecoins 2030: Web3 to Wall Street.” [archived PDF] Citi Institute, September 2025.

Download this article [archived PDF].

Related Webinar

PaymentsJournal is offering a webinar entitled “Stablecoins and the Reinvention of Remittance” on Tuesday, May 12, 2026 1:00-2:00 PM EDT.

RSVP for their webinar.

China to Sustain Top-Down, Debt-Fueled Investment in Major Projects and Security Capacities, Ex-Official Says

Dong Yu, now at Tsinghua, says via state media that Beijing-decreed, central govt bond-backed construction will continue into the next five years.

[from the Center for China & Globalization’s Pekingology]

by Zichen Wang, 10 August, 2025

The key concept in today’s newsletter is 国家重大战略实施和重点领域安全能力建设, in abbreviation in Chinese as 两重 liǎng zhòng.

In English, it is translated officially as the implementation of major national strategies and building up security capacity in key areas, hereinafter referred to as “Two Major Undertakings.”

The concept first appeared in official policy documents in the Chinese Premier’s Report on the Work of the Government [archived PDF] in March 2024.

To systematically address funding shortages facing some major projects for building a great country and advancing national rejuvenation, it is proposed that, starting this year and over each of the next several years, ultra-long special treasury bonds be issued. These bonds will be used to implement major national strategies and build up security capacity in key areas. One trillion yuan of such bonds will be issued in 2024.

By the end of the year, the yuan tag, despite being approved by the national legislature, had changed by 300 billion. The People’s Daily newspaper reported in December 2024.

As of now, the 700 billion yuan in ultra-long-term special treasury bonds allocated for the “two major undertakings” has been distributed in three batches to specific projects.

In 2025, the following year, the Report on the Work of the Government [archived PDF] says,

A total of 1.3 trillion yuan of ultra-long special treasury bonds will be issued, 300 billion yuan more than last year.

735 billion yuan will be earmarked in the central government budget for investment. We will put ultra-long special treasury bonds to good use, increase ultra-long-term loans and other types of financing support, and strengthen top-down organization and coordination to ensure greater support for the implementation of major national strategies and security capacity building in key areas.

A simultaneous Finance Ministry budget plan [archived PDF] rounds up the overall central government spending for the Two Major Undertakings to 800 billion yuan in 2025.

In yuan terms, the much-touted new government subsidies to households pale in comparison with the two major undertakings.

Also from the 2025 Report on the Work of the Government [archived PDF]:

Ultra-long special treasury bonds totaling 300 billion yuan will be issued to support consumer goods trade-in programs. This represents an increase of 150 billion yuan over the previous year.

This week, China announced this week that the phased free preschool education policy will cover all children in their final year of kindergartens, saving families 20 billion yuan. Childcare subsidies unveiled in July amount to 90 billion yuan.

As Joe Biden repeated over the years,

Don’t tell me what you value. Show me your budget, and I’ll tell you what you value.

The National Development and Reform Commission said last month:

In 2025, a total of 800 billion yuan has been allocated for the “two major undertakings,” supporting 1,459 projects in key areas such as ecological restoration in the Yangtze River Basin, major transportation infrastructure along the Yangtze River, the New Western Land–Sea Corridor, high-standard farmland, major water conservancy projects, urban underground pipeline networks, the “Three-North” shelterbelt program, and the renovation of hospital wards.

Now that the 2025 money has been spent by July and China is drawing up its next Five-Year Plan for 2026-2030, will there be more such projects in the future?

In a column for the state-run China News Service this week, Dong Yu, previously Deputy Director-General of the Second Economic Bureau of the Office of the Central Financial and Economic Affairs Commission and, before that, an official at China’s National Development and Reform Commission (NDRC), pointedly said,

In the next step, during the formulation and implementation of the 15th Five-Year Plan, the “two major undertakings” will continue to occupy an important place, be organically incorporated into the new five-year plan, and form close alignment and sustained momentum with major national strategies, major plans, major projects, and key initiatives…

…Such a major strategy will be pursued with persistence—it will not remain rhetorical, nor will it be reversed abruptly.

He did not cite a source of information in his article.

Continuing with his lecturing style, Dong, now Executive Vice Director of China Institute for Development Planning, Tsinghua University, rebuked some unspecified market analysis that had observed the investments just were a one-time boost shot.

Some market institutions once analyzed that when China’s economy was facing short-term difficulties and challenges, the launch of the “two major undertakings” was mainly aimed at expanding investment in the short term to stabilize growth. Such a view clearly lacks a professional understanding of the decision-making intentions and logic, fails to properly grasp the relationship between the short term and the medium-to-long term, as well as between objectives and means, and inverts the proper order of priorities—a misconception that needs to be pointed out and corrected.

Dong also highlighted what he said was the unusual nature of the “strategic move,” including that central government debts fueled the investments, and they were selected “top-down,” rather than primarily relying on local government proposal or input.

The two undertakings were formally submitted for deliberation at the 2024 National People’s Congress after the central leadership made its decision and arrangements…

The central authorities have shown firm determination in this work, adopting the ultra-long-term special treasury bond—a macro policy tool that has rarely been used. Compared with several past issuances of special treasury bonds, the funding arrangement for the “two major undertakings” spans a longer cycle, has a broader scope of application, and will continue to advance in the next stage. It can be said that the scale and intensity are unprecedented. In 2024, a total of 700 billion yuan in ultra-long-term special treasury bonds was allocated, and in 2025, the figure is 800 billion yuan, all of which have now been fully disbursed.

The organization of the “two major undertakings” construction is top-down, completely different from the past practice in the investment sector where projects were determined through bottom-up applications. The purpose is to facilitate the smoother downward transmission of the needs of major national strategies. Relevant [central] government departments, by identifying shortcomings and weaknesses, specifying key areas, and refining project requirements, have ensured that the project list is no longer a collection of fragmented local items. Instead, projects are planned in an integrated manner by category and sector, with strengthened guidance for key regions, more targeted measures, and clearer standards.

Although an exhaustive list of the 1,459 projects does not appear to be available to the public, the “security capacity” build-up in the two major undertakings should be understood in broad terms, and Dong claims the investments put China on a sounder footing globally now that Donald Trump rules America again.

In recent years, the central authorities have emphasized security awareness and bottom-line thinking in development planning, a shift closely related to changes in the international situation. The closer China’s economy becomes intertwined with the global economy, the more comprehensive its considerations must be regarding issues such as food security, energy security, industrial security, and ecological security. The second “undertaking” in the “two major undertakings”—the strengthening of security capabilities in key areas—is precisely a forward-looking arrangement. The dramatic changes in the international environment since the beginning of 2025 have further underscored and confirmed the necessity of enhancing security capabilities, fully demonstrating that the central authorities’ thinking and deployment have been prescient and ahead of the curve.

Dong’s article via China News Service is fully translated below.

中央这一先手棋很不寻常

This Strategic First Move by the Central Authorities Is Highly Unusual

by Dong Yu, Executive Vice President, Institute for China Development Planning, Tsinghua University

The issuance of ultra-long-term special treasury bonds to support the implementation of major national strategies and the building of security capacities in key areas (hereinafter referred to as the “two major undertakings”) has become one of the hottest topics in China’s economy in recent years. Any observation of China’s present and future economic trajectory must include research and analysis of these two undertakings. More than a year has passed since the initiative was launched, making it both necessary and timely to evaluate its effectiveness, understand its operating mechanisms, and look ahead to its prospects.

The “Two Major Undertakings” Are by No Means Ordinary Policy Measures

In terms of decision-making background and process, as well as policy intensity and scope, the launch and implementation of the two major undertakings stand out from other policies. They represent a top-level design initiative.

Understanding a policy starts with its background. From the sequence of events leading to the proposal, this was a proactive, historic choice. The two undertakings were formally submitted for deliberation at the 2024 National People’s Congress after the central leadership made its decision and arrangements. The timing was significant: the 20th Communist Party of China National Congress had laid out a series of major long- and medium-term strategic initiatives that needed concrete engineering projects to push forward. China was midway through two Five-Year Plans, yet strategic advancement could not wait. The central leadership thus introduced the two major undertakings as a groundbreaking initiative.

Strategically, the undertakings directly address the needs of advancing long-term objectives. From the outset, they have been aimed squarely at the goals of Chinese modernization. By breaking down these goals into specific tasks and identifying the most difficult bottlenecks, the undertakings found their points of focus. Some of these tasks might take decades for other countries to achieve, but China has chosen not to delay—tackling them head-on at the starting stage of the new journey toward modernization. This model is uniquely Chinese and has been proven by history to be a key factor in China’s remarkable development successes.

The undertakings are also highly forward-looking—a “first move” by the central leadership. In recent years, national development planning has placed greater emphasis on security and on guarding the bottom line, in response to changes in the international environment. The closer China’s economy is linked to the global economy, the more comprehensive its considerations must be on food security, energy security, industrial security, and ecological security, and other issues. The second “major” in the initiative—security capacity building in key areas—is an arrangement made in anticipation of future challenges. The sharp changes in the international environment since 2025 have only highlighted and validated the necessity of strengthening security capacities, demonstrating that the central leadership’s thinking and arrangements were ahead of the curve.

The undertakings also have a strong overall and systemic quality, constituting a key move in macroeconomic governance. They focus on areas of outstanding importance to economic and social development and have a high degree of relevance to the overall development landscape. The policy toolkit they employ integrates investment, fiscal, science and technology, education, social, and ecological policies. This comprehensive package embodies the use of systems thinking to drive development and will significantly impact all aspects of the economy and society.

A Manifestation of Central Will

Extraordinary measures are for extraordinary tasks. The strategic objectives of Chinese modernization are long-term undertakings, and the two major undertakings provide the foundational support through systematic design and substantial funding.

The central leadership has committed to this initiative by adopting the rarely used macroeconomic tool of ultra-long-term special treasury bonds. Compared with previous special bond issuances, the funding for the two undertakings spans a longer cycle and serves a wider range of purposes, with plans for continued implementation. In both scale and intensity, this is unprecedented: 700 billion yuan in 2024 and 800 billion yuan in 2025, all of which has already been allocated.

In terms of priorities, it vividly reflects the principle of “concentrating resources to accomplish major undertakings.” The focus areas include urban–rural integration, regional coordination, high-quality population development, food security, energy and resource security, ecological security, and self-reliance and strength in science and technology—all crucial to building a strong nation and achieving national rejuvenation. These require coordinated planning and advancement. In just over a year, the high-level requirements have been translated into batches of concrete projects, reflecting the efficiency of implementation.

Project selection is guided by the principle that only the central government can resolve these issues. Some involve urgent development bottlenecks with significant obstacles that cannot be overcome by conventional means, such as scientific and technological breakthroughs, high-standard farmland construction, and upgrading the quality of higher education. Others are long-desired but previously unachievable projects that lack local willingness or capacity to implement, such as major cross-regional infrastructure, cross-basin wastewater treatment, and urban underground utility upgrades.

The organization of the “two major undertakings” construction is top-down, completely different from the past practice in the investment sector where projects were determined through bottom-up applications. The purpose is to facilitate the smoother downward transmission of the needs of major national strategies. Relevant [central] government departments, by identifying shortcomings and weaknesses, specifying key areas, and refining project requirements, have ensured that the project list is no longer a collection of fragmented local items. Instead, projects are planned in an integrated manner by category and sector, with strengthened guidance for key regions, more targeted measures, and clearer standards.

A Combination of “Hard” and “Soft” Measures

From the start, the undertakings were designed not only to fund “hard” engineering projects but also to include comprehensive arrangements for “soft” institutional and policy measures—an important innovation.

The emphasis on soft measures is pragmatic. Given the high importance and public nature of the projects, long-term mechanisms must be designed to ensure smooth progress during construction and sustainable operation thereafter. This includes drafting specialized plans to provide strategic guidance, introducing targeted policies to improve funding efficiency, and innovating institutional arrangements to safeguard implementation.

The implementation process is thus also a process of improving the investment and financing system, updating project management approaches, and enhancing investment effectiveness. In some sectors, soft-measure experiments have had positive impacts, creating healthy interaction with hard investments.

For example, the healthy operation of urban underground pipelines depends on sound maintenance mechanisms. Some local governments have attracted long-term institutional funds into major pipeline projects through debt or equity investment plans, stabilizing private sector returns via operational rights, government subsidies, and tax incentives. Others have introduced province-wide upstream–downstream gas price linkage, set reasonable water supply return rates based on market profits, and advanced the marketization of gas and water prices—reducing losses for public utilities and encouraging private investment.

Similarly, in the quality undergraduate expansion program, mechanisms play a guiding role: schools effectively implementing expansion plans receive increased support, while those performing poorly see reduced support; universities without expanded undergraduate admission plans are generally excluded from special bond funding. Disciplines and programs are adjusted dynamically to align talent training with economic and societal needs.

Directly Relevant to Everyone

The nature of the undertakings is not determined by project size but by their strategic objectives and significance. As long as they align with major national strategies, they are included—whether as large standalone projects, such as high-speed rail along the Yangtze River, or as “project packages,” such as Yangtze River wastewater treatment composed of multiple treatment facilities. This flexible, problem-oriented approach allows better alignment with public needs.

As projects break ground and enter operation, their benefits to people’s livelihoods will become increasingly evident. Observers should not see the undertakings as distant from daily life; they will bring tangible improvements to everyone’s quality of life.

For example:

Urban underground pipelines: Upgrades to gas, water, and heating systems will greatly improve safety and resilience. Renovation of old gas pipelines is nearing completion, reducing accident rates by over 30%. Eliminating hidden risks in unseen places increases residents’ sense of security.
Food security: Gradually converting all permanent basic farmland into high-standard farmland will stabilize grain output and enhance food safety. Higher standards mean safer products, so people will eat with greater confidence.
Yangtze River protection: Building or upgrading over 60,000 kilometers of sewage pipelines in the Yangtze Economic Belt will greatly improve the river’s ecological environment and resolve long-standing public concerns.
Transportation: Creating the shortest Shanghai–Chengdu high-speed rail corridor (approx. 1,900 km) will connect the Yangtze River Delta, the middle Yangtze region, and the Chengdu–Chongqing area more quickly, cutting travel time nearly in half and boosting east–west connectivity.
Ecological security: Implementing the “Three-North” shelterbelt project over 130 million mu (93 million hectares), with good survival rates for trees, shrubs, and grasses, will safeguard northern ecological security and create new income opportunities.
Higher education: “Double First-Class” universities will see markedly improved conditions, with over 500,000 new standard dorm beds. Quality undergraduate enrollment will rise by 16,000 in 2024 and over 20,000 in 2025, giving more students access to quality education and ensuring basic living needs for those from low-income families.

A Bold Stroke in the History of Development

The two major undertakings are a major decision by the CPC Central Committee and the State Council, aimed at the overall strategy of building a strong country and achieving national rejuvenation. They play an irreplaceable role in advancing Chinese modernization.

They are not short-term measures but focus on medium- to long-term development. Some market institutions once analyzed that when China’s economy was facing short-term difficulties and challenges, the launch of the “two major undertakings” was mainly aimed at expanding investment in the short term to stabilize growth. Such a view clearly lacks a professional understanding of the decision-making intentions and logic, fails to properly grasp the relationship between the short term and the medium-to-long term, as well as between objectives and means, and inverts the proper order of priorities — a misconception that needs to be pointed out and corrected.

Since implementation began, the undertakings have provided important support for economic stability. Although their starting point was not short-term growth, the resulting investment has boosted employment and consumption, helping to expand domestic demand and stabilize growth. In the next step, during the formulation and implementation of the 15th Five-Year Plan, the “two major undertakings” will continue to occupy an important place, be organically incorporated into the new five-year plan, and form close alignment and sustained momentum with major national strategies, major plans, major projects, and key initiatives.

They will also bolster the country’s core competitiveness. As foundational support for Chinese modernization, they will strengthen factor security and resolve long-term bottlenecks, with far-reaching significance for shaping China’s development prospects. In an era of intensifying major-power competition, they will provide stable expectations and significantly enhance China’s capacity to manage international uncertainty. Such a major strategy will be pursued with persistence—it will not remain rhetorical, nor will it be reversed abruptly.

Though implementation has only recently begun, the undertakings’ historic role will continue to grow over time. In the future, looking back, they will surely stand as an important part of the “China story” and leave a bold stroke in the history of the People’s Republic’s development.

Economics-Watching: Earmarking in Programmable Payments

[from the Federal Reserve Bank of Atlanta]

by Chris Colson, payments expert, Atlanta Fed Payments Forum

As programmable payments become more common, an old-school budgeting idea is making a comeback: earmarking. At its core, earmarking just means setting money aside for a specific purpose—like rent, payroll, or taxes—so it’s only used for that. It’s a simple concept, but when combined with automation, it could be the budgeting upgrade many people and businesses have been waiting for.

The word “earmark” dates to the 15th century, when farmers would notch their animals’ ears to show ownership. Over time, it came to mean setting something aside for a specific use. In personal finance, this idea lives on in the envelope system, where people divide up cash into labeled envelopes—groceries, bills, savings—and stick to those limits. It works, but let’s face it: handling cash envelopes isn’t exactly practical in a digital-first world.

That’s where programmable payments come in. These are payments that happen automatically based on rules you set. Instead of stuffing envelopes, you set up digital “buckets” for your money. Maybe 20 percent of every gig work payment goes straight to a tax account or your weekly paycheck splits into rent, groceries, and savings buckets automatically.

Through banking apps, digital wallets, or budgeting platforms, consumers choose or create spending categories and assign rules—like percentages, spending limits, or triggers. For example, you can link your checking account to a programmable wallet that auto-transfers money into savings or investments accounts on payday, or prevents spending on dining once you hit your monthly cap.

It’s like having a personal money assistant organizing your finances, paying your bills, and keeping you on budget without you having to think about it. For businesses, this brings new efficiency to managing payroll, vendor payments, and escrow accounts.

The timing couldn’t be better. Many Americans struggle financially. According to the Federal Reserve’s 2024 Survey of Household Economics and Decision-making (SHED), nearly 37 percent of adults wouldn’t be able to cover a $400 emergency without borrowing or selling something. Earmarking can help build emergency savings before the money gets spent elsewhere.

There’s also a big gap when it comes to retirement readiness. The Fed’s Survey of Consumer Finances (SCF) found that just over half of families have any kind of retirement account, and many people say they’re not on track with long-term savings. Automated payments into earmarked savings buckets can help make regular saving less of a hassle and more of a habit.

Even our spending habits show why this works. The Fed’s 2025 Diary of Consumer Payment Choice shows people still prefer cash for small purchases. Programmable payments bring that discipline into the digital world without the need for physical cash.

The upside of earmarking with programmable payments is clear: automation takes the work out of budgeting, real-time visibility helps track your money, and flexible rules let you customize how it all works. It’s also useful in more regulated settings like distributing aid or managing shared accounts because it adds accountability.

But if the rules are too rigid or confusing, that can frustrate users. Businesses may need to integrate programmable features with legacy systems, which takes time and money. And over reliance on automation poses risks—glitches, errors, or outdated settings can cause missed payments or unintended consequences.

Still, earmarking with programmable payments is a smart, modern take on a tried-and-true budgeting technique. It may not be right for every situation—and some apps already do this behind the scenes—but used intentionally, it can bring clarity, control, and purpose to the way money flows. In a complex financial world, that’s something both individuals and experts can benefit from.

Economics-Watching: Remittances in Times of Uncertainty: Understanding the Dynamics and Implications

[from the International Monetary Fund, by Patrick A. Imam, Kangni R Kpodar, Djoulassi K. Oloufade, Vigninou Gammadigbe]

This paper delves into the intricate relationship between uncertainty and remittance flows. The prevailing focus has been on tangible risk factors like exchange rate volatility and economic downturn, overshadowing the potential impact of uncertainty on remittance dynamics. Leveraging a new dataset of quarterly remittances combined with uncertainty indicators across 77 developing countries from 1999 Q1 to 2019 Q4, the analysis highlights that uncertainty in remittance-sending countries negatively affects remittance flows. In contrast, uncertainty in remittance receiving-countries has a more complex, dual effect. In countries with high private investment ratios, rising domestic uncertainty leads to a decline in remittances. Conversely, in countries with low public spending on education and health, remittances increase in response to uncertainty, serving as a social safety net. The paper underscores the heterogeneous and non-linear effects of domestic uncertainty on remittance flows.

Read the paper [archived PDF].

Small businesses, big ideas

Keeping pace with technology

Every idea counts

From 2014 to 2025, Japan bought foreign securities worth about 2% of GDP a year. In 2026 the tide is turning. Banks are selling foreign bonds and capital flow has turned to a small net inflow.

Japan’s outward flow has turned into a net sale

Foreign bonds and foreign equity have different investors

Japan holds 147% of GDP worth of securities abroad

Part 1. Selling foreign bonds in 2026

Banks, reserves, pensions and insurers own the bonds

Banks are selling while pensions keep buying

2026 is different from 2022: Yen rates are at 30-year highs

Part 2. Pension funds are selling foreign equity, offsetting households’ buying

Part 3. Pension funds to put more money in yen

GPIF likely to raise its asset allocation into yen bonds

Part 4. Recent development and what to watch

Weekly data shows bond selling continuing into October

Equity flows have no sustained direction

What to watch

Conclusion

The capital-flow tide is turning

Pressure on Yana to quit grows

Takaichi questioned on tax cut funding

First post-scandal poll suggests Yana could cost Takaichi

Further reading

Earnings on Japan’s foreign direct investment (FDI) reached 103% of new FDI in 2022–25. With dividends and retained earnings counted together, Japan Inc. now needs to sell little yen to invest abroad.

Key takeaways

Japan’s FDI stock now earns 103% of new investment

Chart 1

A strong yen helped drive Japan’s first outward FDI boom

Chart 2

Chart 3

Japan’s outward FDI stock rose to 56% of GDP

Chart 4

The weak yen has slowed offshoring, not reversed it

Domestic investment has grown slowly despite the weak yen

Economic security is bringing some production home

Japan’s industrial-policy record gives reason for caution

FDI no longer appears to drive yen weakness

References

GPIF, one of the largest national pension funds in the world, is likely to rebalance its assets from non-yen bonds to yen bonds, signaling a big turn in Japan’s cross-border capital flows.

Key takeaways

Japan has one of the Largest Pension Funds in the World

Chart 1

GPIF used to invest most of its asset into JGBs

Chart 2

UEDA in 2013 Saw a Bond Crash Coming

GPIF CEO Priced the Crash at 3% in 2014. We Are There Now

The 2014 cut in the weight was partly an emergency escape

How GPIF decides its weights

Why GPIF kept the weight in 2025 and why circumstances changed

The Whale Problem and the Washington Problem

How much GPIF buys: ¥32tn at 35%, ¥80tn at 50%

The sister funds move with the whale

Conclusion

First Meeting of the Study Group on Strengthening Japan-Africa Economic Partnership

(Reference 1) Japanese Members

(Reference 2) African Members

(Reference 3) Attachment

G7 Evian Summit

Working Session on “Reviving a Balanced, Shared and Sustainable Economic Growth”

Situation in Iran (Signing of a Memorandum of Understanding between the United States and Iran)

(Message from Foreign Minister MOTEGI Toshimitsu [茂木 敏充])

Parliamentary Vice-Minister for Foreign Affairs ERI’s Visit to the United States

(Reference) Schedule

The 7th Japan-Australia Cyber Policy Dialogue

The United States has introduced a new stablecoin regulatory framework, but concerns over the cryptocurrency’s place in the global economy remain.

Stablecoin Fundamentals

A New Regulatory Framework

Parallels to the Free Banking Era

The Road Ahead

Readings

Related Webinar

Dong Yu, now at Tsinghua, says via state media that Beijing-decreed, central govt bond-backed construction will continue into the next five years.

The “Two Major Undertakings” Are by No Means Ordinary Policy Measures

A Manifestation of Central Will

A Combination of “Hard” and “Soft” Measures

Directly Relevant to Everyone

A Bold Stroke in the History of Development

(Message from Foreign Minister MOTEGI Toshimitsu [茂木敏充])