The Origins of Money: Two Foundational Theories

Monetary theory has long oscillated between two foundational paradigms—commodity money and credit money. The former posits that money evolved organically from barter systems in early economies. Over time, certain widely valued goods became mediums of exchange, eventually transforming into standardized forms such as gold coins and, later, banknotes backed by gold.

In contrast, credit money theory suggests that money emerged not from trade, but from recorded obligations. Early societies tracked debts within trust-based systems. These debt records gradually acquired monetary characteristics, especially in larger or deferred transactions. Modern banking practices—where interbank settlements are managed through netting mechanisms rather than physical transfers—exemplify this conceptual lineage. In this view, money is not a tangible object but a ledger entry of trust.

Government bond internationalization: A new frontier

Viewed through the lens of credit money theory, the internationalization of sovereign debt instruments, especially government bonds, assumes profound significance. Unlike fiat currencies, which can be subject to geopolitical and monetary volatility, government bonds represent direct expressions of sovereign credit. They offer an immediate and transparent price mechanism to gauge a nation’s fiscal health and institutional credibility.

Deep, liquid, and globally accessible bond markets could ultimately serve a more strategic role than traditional currency internationalization. By reducing reliance on volatile currency conversions, sovereign bonds can act as stable transnational “money” in international trade and finance—trusted instruments grounded in state-backed creditworthiness.

That said, bond internationalization is not without challenges:

  • Default risk inherent in sovereign issuance
  • Interest rate volatility, limiting their function as a store of value
  • High liquidity thresholds necessary for transactional use
  • Policy trade-offs associated with open capital markets

Still, a well-managed bond internationalization strategy holds potential to reshape global finance toward a more transparent, rules-based, and trust-centered architecture.

The yen’s global constraints

Japan’s effort to internationalize the yen—aspiring to elevate it alongside the US dollar and euro—has achieved only limited progress. While Japan remains a major economic power, the yen accounts for just 4-6 percent of global currency reserves, compared to around 50 percent for the dollar and 20 percent for the euro. Even in trade invoicing, the yen’s share remains underwhelming—only about 35-40 percent of exports and 25-30 percent of its imports are denominated in yen—figures that trail behind similarly sized economies such as Germany and the UK.

These figures underscore the entrenched gravitational pull of the dollar and the structural inertia of global financial systems, which tend to favor path-dependent liquidity and incumbency effects.

Japanese government bonds: An understated ascent

In contrast, Japanese Government Bonds (JGBs) have quietly gained international traction. Foreign ownership has risen from 7.0 percent in 2011 to 11.9 percent in 2025, amounting to ¥144.2 trillion (about USD 1 trillion). Although the Bank of Japan (BOJ) still holds roughly 50 percent of JGBs, growing foreign participation signals increasing international confidence in Japan’s fiscal and macroeconomic frameworks.

Several factors catalyzed this ascent:

  • Safe-haven appeal: Japan’s political stability and monetary orthodoxy continue to render JGBs a preferred asset in turbulent times.
  • Yield scarcity: In a global context of low or negative yields, JGBs offer capital safety with reasonable liquidity.
  • Market depth: With over ¥1,200 trillion (about USD 8 trillion) outstanding, the JGB market is among the world’s most liquid fixed-income spaces.
  • Portfolio diversification: JGBs exhibit low correlation with major asset classes, making them attractive to global institutional investors.
  • Policy facilitation: Japan’s progressive capital account liberalization—beginning with the 1980 Foreign Exchange and Foreign Trade Control Law (shift from ‘prohibition in principle’ to ‘freedom in principle’)—and its more recent cross-border collateral frameworks (e.g. BOJ arrangements with BI, BOT, BSP, MAS) have rendered JGBs an increasingly accepted form of global financial collateral.

Even though JGBs are yen-denominated and expose foreign investors to currency volatility, they are among the fastest growing asset class on Euroclear’s Collateral Highway®, further integrating them into global financial infrastructure.

Reframing the strategy: Bonds over currency?

The JGB experience invites a broader reassessment—might a strategic focus on sovereign bond internationalization have been a more pragmatic alternative to Japan’s longstanding emphasis on currency internationalization?

The benefits of deep international sovereign bond market include:

  • Stable funding: A diverse investor base reduces dependency on domestic financial institutions.
  • Market discipline: Greater scrutiny from foreign investors can improve governance and transparency.
  • Efficient price discovery: Broader participation fosters better liquidity and
  • Global influence: Foreign demand for sovereign debt signals macroeconomic credibility and augments financial soft power.

Concerns over capital outflows are valid, but Japan’s robust domestic investor base and persistent current account surpluses provide strong buffers.

A dual mandate for the future

Japan’s future financial strategy should move beyond binary choices. Rather than choosing between currency and bond internationalization, the goal should be to pursue a dual mandate:

  • Maintain yen stability and transactional utility in regional and strategic domains.
  • Expand the international role of JGBs as trusted, liquid, and collateralizable financial instruments.

This shift in perspective offers a nuanced lesson for policymakers—a nation’s financial influence need not rest solely on the internationalization of its currency. The structure, depth, and trustworthiness of its sovereign bond market can offer an equally powerful —if not more—sustainable platform for regional integration.

Notably, several ASEAN economies, supported by stronger fiscal fundamentals and lower debt burdens than Japan, may be even better positioned to pursue bond internationalization, provided they acquire sufficient market size, depth, and credibility.

Ultimately, a nation’s most meaningful contribution to regional and global financial stability may lie less in how widely its currency is used—as a medium of exchange, unit of account, and reserve asset—and more in how deeply its sovereign bonds are integrated into global markets.