Akio Kawato
In September 2008, the collapse of Lehman Brothers brought the world economy to a temporary halt. Today, excess liquidity in Japan and the United States, stock market bubbles, and ever-expanding fiscal deficits are raising fears of “another 2008.”
Yet even if the next crisis resembles 2008, the scenery will be somewhat different. That difference is worth examining.
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In 2008, after the housing bubble had begun to collapse the previous year, markets were already pricing in economic stagnation, and long-term interest rates were falling. The bursting of the housing bubble triggered a collapse in the value of subprime securities built on mortgage loans, along with growing distrust of the major banks holding them. Capital fled into safe assets—mainly government bonds. Treasury prices rose sharply. Demand for dollars also surged, and the dollar index kept rising into 2009.
Today, the basic situation is the opposite. Interest rates are rising because of distrust in government finances themselves. If inflation expectations continue pushing rates higher, bond prices will keep falling until a point of panic selling arrives. At that stage, the dollar may continue rising for a while. But once markets begin to suspect that the United States itself is becoming insolvent, the dollar could start to fall as well.
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At that point, the yen carry trade between Japan and the United States would likely unwind violently and reverse direction, producing a significant appreciation of the yen. Around that stage, however, the Federal Reserve would almost certainly intervene—first by supplying liquidity, and eventually by directly purchasing government bonds again. The dollar would likely recover.
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Europe’s role in this process is also critical. A large share of Europe’s trade and financial settlements is conducted through the Eurodollar system. This is not money created by the Fed, but rather dollar-denominated credit created by European private banks through lending. Based on oil-export revenues flowing in from the Gulf states and expanded through interbank lending and derivatives, this offshore dollar-credit system has grown enormous.
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During the 2008 Lehman crisis, European banks suddenly began doubting each other’s solvency and froze Eurodollar lending almost simultaneously. As a result, Europe faced an acute dollar shortage and severe payment bottlenecks. At that time, the European Central Bank obtained dollars through swap lines with the Fed and supplied them to private banks, preventing a systemic breakdown.
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The same kind of overseas dollar shortage and settlement paralysis could certainly happen again this time. However, because permanent swap lines with the Fed already exist, dollar liquidity would likely be supplied faster than in 2008.
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On the other hand, this time there is an added danger: distrust not only of financial institutions, but of U.S. fiscal policy and even U.S. Treasury bonds themselves. That makes this crisis potentially more dangerous than 2008.
If that distrust becomes dominant, something counterintuitive could happen: even as interest rates rise, the dollar could fall. That is precisely what markets briefly showed during the turmoil of April 2025.
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If petrodollar inflows decline in the future—because war with Iran reduces Gulf oil exports—and Eurodollar liquidity shrinks as a result, or if President Donald Trump were to withhold dollar liquidity in an attempt to pressure Europe, then the EU and Britain would have little choice but to develop some substitute mechanism.
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“Euro-Euro” sounds awkward, but some equivalent arrangement could emerge: for example, stabilizing the euro through swap agreements with the Bank of Japan and others, while partially replacing Eurodollar credit with euro-based alternatives.
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For Japan, all of this could become an excellent opportunity to escape the low-interest-rate trap created by Abenomics. Japan should carefully watch interest-rate movements in the United States and Europe and prepare both the institutional flexibility and the intellectual flexibility to respond. During the Abenomics era, while the West moved quickly to raise rates, Japan remained stubbornly committed to monetary easing alone, producing an absurdly weak yen—and even now, it has not fully escaped from that mistake. It would be wise not to repeat it.