Predictions about the potential decline of the U.S. dollar as the world’s leading currency have persisted for decades and are gaining traction. Proponents of cryptocurrency suggest that Bitcoin or other blockchain-based currencies might replace the dollar. Meanwhile, foreign policy advocates express concerns over the Chinese renminbi’s potential to undermine the dollar, while advocates for sound money warn that increasing U.S. debt and inflation could devalue the dollar significantly.
Contrary to these predictions, Paul Blustein presents a differing view, asserting that the dollar’s position as the dominant global currency is secure, barring any major errors by the U.S. government. In his book, “King Dollar: The Past and Future of the World’s Dominant Currency,” Blustein attributes the dollar’s dominance to factors such as the unmatched depth, breadth, and liquidity of U.S. financial markets, coupled with America’s robust legal and regulatory framework.
Blustein argues that although other currencies have similar attributes and hold some international presence, none rival the dollar’s global influence. These alternative currencies face limitations that restrict their roles on the world stage, as illustrated by the Japanese yen’s inability to surpass the dollar.
During the 1980s, U.S. Treasury officials visiting Tokyo for yen-dollar discussions were treated to lavish hospitality, including traditional Kaiseki dinners and entertainment. Despite the hospitality, the American officials often found these visits to be challenging. Their mission was to advocate for the internationalization of the yen, encouraging Japan to remove strict regulations within its financial system to allow greater monetary movement.
However, progress was slow. Japanese negotiators skillfully countered U.S. proposals by explaining why Tokyo couldn’t adopt the desired measures or why changes would need to proceed slowly. Diplomatic exchanges were typically formal, with each side seated across from the other at long tables while numerous junior Finance Ministry officials provided support.
U.S. impatience was voiced notably during a session when Treasury Undersecretary Beryl Sprinkel rejected arguments from the Japanese negotiator Tomomitsu Oba, using a metaphor involving piglets to emphasize his point. This exchange led to laughter and was followed by Oba’s assurance that Japan’s approach would shift from “step by step” to “stride by stride.”
Despite efforts by U.S. officials to promote a competitor currency, Japanese officials did not pursue such a challenge, viewing a low-profile yen as essential to their nation’s economic success post-war. Japan’s economic growth during this period was remarkable, with major companies like Toyota and Sony achieving significant gains in global markets.
Japan’s growth model, based on “financial repression,” prioritized using its financial system to benefit manufacturers and exporters. Strict controls were placed on cross-border financial movements, and by 1970, almost no Japanese trade was conducted in yen. As these restrictions were gradually relaxed, Japanese banks and savers continued to face limits on overseas money transfers to maintain domestic capital availability.
By the 1980s, the U.S. demanded changes to these policies, aiming to alleviate the challenges faced by American industries due to the strong dollar. Under U.S. pressure, Japan agreed to a yen-dollar agreement in 1984 and the Plaza Accord in 1985, both aimed at adjusting the yen’s valuation and increasing financial system liberalization.
These agreements partially addressed U.S. concerns. Meanwhile, Japan’s economy continued to grow. The Bank of Japan’s low-interest rates spurred significant increases in stock and property prices, with Japanese corporations adapting by moving production overseas. This economic activity established Japan as a major trading nation within Asia.
However, predictions of the yen’s emergence as a dominant currency underestimated Japan’s challenges. By the mid-1990s, Japan faced deflation following economic downturns caused by the bursting of asset bubbles. Despite reform efforts, Japan struggled to shed its financial repression legacy.
Further liberalization in 1999 saw the yen remain a minor international currency player, with Japan’s economic growth hampered by an aging populace and shrinking demographic. The Bank of Japan’s bond-buying efforts to combat deflation resulted in minimal trading activity, contributing to the yen’s limited international presence.
Blustein concludes that had Japanese officials acted more decisively, there could have been a stronger incentive for dollar users to transition to yen. However, that opportunity was ultimately missed.
This report is based on an excerpt from “King Dollar” by Paul Blustein, published by Yale University Press in 2025.
