The World’s Cheapest Loan

I will reconstruct Japan’s economy with bold monetary policy. — Shinzo Abe

India is on a borrowing spree, but not in US dollars. The new favourite currency for big loans is the Japanese Yen, and the reasons are surprisingly clever.
Economy & Policy
Author

Satvik Raman

Published

August 4, 2024

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Introduction

In December 2023, the Indian government secured a $250 million loan from the Asian Development Bank for the Delhi-Meerut Regional Rapid Transit System. That is a massive project, connecting two major cities in a fast-growing corridor. But the interesting part was not the amount or the project. The interesting part was the currency. The loan was not in US dollars. It was in Japanese Yen.

Why Everybody Borrows in US Dollars

To understand why borrowing in Yen is unusual, you first need to understand why the US dollar dominates global lending. The dollar is the world’s reserve currency, meaning most international trade and finance runs through it. When Indian companies or the government want to borrow money from foreign banks or institutions, the contracts are almost always priced in dollars. As of mid-2024, India’s total external debt stood at $663.8 billion, and more than half of it was denominated in US dollars. This dominance is not just a habit, it is a practical reality of global commerce.

How Japan Broke Its Own Economy

To understand the Yen’s appeal right now, you need a quick detour into Japan’s economic history. In the 1980s, Japan was booming. Real estate prices were climbing, stock markets were soaring, and people were borrowing heavily to invest. The government eventually grew worried and raised interest rates to cool things down. The bubble burst in 1990, and what followed was decades of stagnant growth, falling wages, and banks weighed down by unpaid loans.

When Prime Minister Shinzo Abe came back to power in 2012, he launched a set of economic reforms that people called “Abenomics.” One major pillar was working with the Bank of Japan to cut interest rates to near zero and even print massive amounts of new money. Japan printed between 60 and 70 trillion Yen as part of this effort. More money in circulation meant the Yen lost value. Japan’s ageing population also meant people saved more and spent less, which kept interest rates low for years. By mid-2024, the Yen had hit a 34-year low against the US dollar.

The Math That Makes Yen Loans Irresistible

When Indian companies and government bodies looked at borrowing in Yen, the numbers were hard to ignore. Interest rates on Yen loans are often less than 1%, compared to around 5% on a typical US dollar loan. That difference alone saves enormous amounts in annual interest payments on large sums. But the savings do not stop there. The Indian rupee appreciated by roughly 18% against the Yen between early 2023 and mid-2024. This means that when it is time to repay a Yen loan, the borrower needs fewer rupees to buy the same amount of Yen, making the loan even cheaper in real terms.

The Borrowing Rush

The companies and government bodies that moved first on Yen loans include some of India’s biggest names. JSW Steel, REC, PFC, and HUDCO collectively raised over Rs 11,000 crore in Yen-denominated debt over the span of about a year. The Tamil Nadu government scored a $300 million loan from the World Bank in April 2024 to upgrade its urban water and sanitation services, and that loan too was denominated in Yen. For JSW Steel, a company with large capital needs for expansion, the difference between paying 1% and 5% interest on thousands of crores is not a minor detail, it is a major strategic advantage. These organisations were not just being clever, they were responding rationally to a historic opportunity created by Japan’s decades-long economic struggles.

The Risk Nobody Should Forget

There is a cautionary tale from the other side of the world that every Yen borrower should study. In the early 1980s, Australian banks began offering Swiss franc-denominated loans to small businesses and farmers because the interest rates were far lower than local options. The scheme worked beautifully at first. Then the Australian dollar fell sharply against the Swiss franc, and suddenly borrowers found that the amount they needed to repay in Australian dollars had ballooned well beyond what they had originally taken out. Many farmers and small business owners went into deep financial distress, and this became known as the Swiss loans affair. The lesson is clear. A cheap foreign currency loan can turn very expensive if exchange rates move against you.

Final Thoughts

India’s shift toward Yen-denominated borrowing is a rational response to an unusual combination of factors, a weak Yen, near-zero Japanese interest rates, and a strengthening rupee. For projects like the Delhi-Meerut rapid transit system or Tamil Nadu’s water infrastructure, the savings are real and significant. But the same logic that makes these loans attractive today is also what makes them risky if circumstances change. If the Yen were to strengthen against the rupee, organisations like JSW Steel and HUDCO would find their repayment costs climbing fast. For now, the bet seems smart, and the key is that the borrowers know it is a bet.