Former Bank of Japan Deputy Governor Hiroshi Nakaso says the U.S. dollar will remain the dominant global currency, but he warns that “cracks” are beginning to show in its long-standing supremacy. These emerging signs of vulnerability are prompting investors and institutions to look for alternatives and diversify their currency holdings.
Nakaso points out that while the dollar’s central role in international finance is unlikely to vanish quickly, its dominance is not immune to change. Increased global economic shifts, geopolitical tensions, and evolving trade policies are contributing factors that could weaken the dollar’s unchallenged position over time.
As a result, many market participants are reallocating parts of their portfolios into other major currencies and safe-haven assets. This trend toward diversification reflects growing caution among investors who want to reduce concentration risk tied to any single currency.
Regarding Japan’s monetary policy, Nakaso expects the Bank of Japan (BOJ) to resume rate hikes once uncertainties tied to U.S. tariff policies and global trade tensions subside. He believes that a clearer policy outlook internationally would give the BOJ more room to normalize policy after years of ultra-low rates.
At the same time, Nakaso stresses the importance of closely monitoring inflation dynamics in Japan. He cautions that rising inflation risks need careful attention to avoid the BOJ falling behind the curve. If inflation picks up faster than expected, the BOJ may need to act more promptly to prevent price pressures from becoming entrenched.
Nakaso’s remarks highlight a cautious, adaptive approach to both global currency trends and domestic monetary policy. Investors should remain mindful of the changing landscape—where the dollar remains central but faces growing challenges—and policymakers must balance normalization of interest rates with vigilance over inflationary developments.
In summary, while the U.S. dollar continues to dominate global finance, signs of strain are encouraging diversification. The Bank of Japan may resume tightening once external uncertainties ease, but rising inflation risks in Japan require careful monitoring to ensure timely policy responses.