Germany Becomes the World’s Top Creditor, Overtaking Japan After 34 Years

In a major shift on the global financial stage, Germany has overtaken Japan as the world’s top creditor country in 2024, ending Japan’s 34-year reign. This change, driven by current account surpluses, exchange rate dynamics, and structural economic trends, reflects broader transformations in global trade and investment patterns.

Why in News?

Germany became the world’s largest net creditor, surpassing Japan for the first time since 1990. Despite Japan reaching record-high net external assets, Germany outpaced it in growth and valuation. Currency fluctuations and trade surpluses played a critical role in this reversal.

What Are Net External Assets?

• Net External Assets = What a country owns abroad − What foreigners own in that country.
• Components include foreign investments, bonds, equities, and property holdings.

Reasons for Japan’s Slip to Second Place

Germany’s Surging Current Account Surplus,

• Reached €240 billion in 2024 (~$250 billion).
• Imports declined more than exports, widening the trade surplus.

Exchange Rate Advantage,

• Euro appreciated ~5% against the Japanese yen.
• Made Germany’s foreign assets look more valuable in yen terms.

Japan’s Strong but Insufficient Performance,

• Japan had a record net asset value of ¥533 trillion ($3.7 trillion), but Germany posted ¥569 trillion ($3.9 trillion).
• Current account surplus stood at ¥30 trillion (~€180 billion).

Key Contributing Factors

Germany

• Benefitted from Eurozone stability and trade umbrella.
• Continued investment in liquid assets like bonds and foreign equities.

Japan

• Suffered from a weaker yen due to low interest rates.
• Domestic economic sluggishness reduced investment appeal.
• Invested heavily in long-term foreign assets like company acquisitions.

Structural Challenges for Japan

• Ageing Population: High savings, limited productive domestic investment.
• Cautious Investments: Preference for low-risk, low-return assets (e.g., US bonds).
• Corporate Strategy: Shift towards direct overseas investments reduces liquidity.

Can Japan Reclaim the Crown?

• Government Stance: Finance Minister Katsunobu Kato is not alarmed; sees steady asset growth.

Hope from Domestic Reforms,

• Shunto Wage Hikes (Spring 2025): Expected average wage rise of 5.4%.
• NISA Scheme: Encourages individual foreign investments.
• Bank of Japan’s Slow Rate Hikes: A modest 0.25% increase expected; caution due to global uncertainties.

Germany’s Future Risk

• Dependent on export-driven model.
• Vulnerable to US tariffs, especially on automobile exports.