Indonesia among big losers of the end of cheap yen

The Bank of Japan’s interest rate hike, raising the benchmark rate to its highest level in 30 years, was the tremor Indonesia had long feared but hoped to delay. By increasing its short-term rate to 0.75%, BOJ governor Kazuo Ueda has done more than stabilize the yen; he has effectively altered the gravity of the Indonesian economy.

For a generation, Indonesia’s rapid industrialization and fiscal stability were quietly underpinned by the “yen carry trade,” a seemingly bottomless reservoir of cheap, Japanese-sourced liquidity that flowed into Indonesian government bonds and corporate ventures.

As that reservoir begins to drain, Jakarta must face a harsh new reality: the era of the Japanese subsidy is over and the cost of Indonesia’s ambitious “Golden 2045” vision has just been significantly repriced.

For Indonesia, a nation that has skillfully navigated the volatile waters of global finance to achieve investment-grade status, the BOJ’s hawkish pivot is nothing less than a systemic shock. It strikes at the heart of the country’s capital account, threatening the stability of the rupiah and forcing Bank Indonesia into a defensive crouch.

As Japanese institutional investors, the quiet giants of the global debt market, begin repatriating capital to chase rising yields in Tokyo, the vacuum left behind in the Indonesian bond market threatens to drive up borrowing costs for a government already committed to massive infrastructure spending and a bloated social safety net.

Front line rupiah

The most immediate danger to the Indonesian financial system is the “violent unwinding” of yen-funded positions in the domestic market. For years, the spread between the BOJ’s near-zero rates and Bank Indonesia’s relatively high yields made the rupiah a favorite destination for carry trade investors.

This flow of “hot money” helped bolster Indonesia’s foreign exchange reserves and kept the rupiah stable even during periods of US Federal Reserve tightening. However, with the BOJ now aggressively normalizing, that trade could quickly turn toxic. The narrowing yield gap will trigger a massive exodus of portfolio investment, putting the rupiah under selling pressure not seen since the “taper tantrum” of 2013.

New currency volatility won’t just be a headache for Bank Indonesia; it will be a direct threat to Indonesia’s corporate sector. Many of Indonesia’s largest conglomerates, particularly those in the energy and manufacturing sectors, hold significant debt denominated in foreign currencies.

While the focus is often on the US dollar, a strengthening yen makes yen-denominated debt, frequently used for long-term industrial equipment financing, significantly more expensive to service. For a mining company in Sulawesi or a textile firm in West Java, the BOJ’s move will translate directly into thinner profit margins and reduced capacity for reinvestment.

Furthermore, Bank Indonesia is now caught in a “hawkish trap.” To prevent a catastrophic slide of the rupiah, the central bank may be forced to hike its own interest rates, even if the domestic economy requires a pause. Such defensive monetary tightening will be a bitter pill to swallow for a government targeting 7% GDP growth.

Higher domestic rates will mean more expensive mortgages for the burgeoning middle class and higher credit costs for small and medium enterprises (SMEs) that form the backbone of the Indonesian economy.

In trying to defend the currency against the yen shock, Jakarta risks choking off the very domestic consumption that has been the primary engine of its post-pandemic recovery.

Geo-economic pivot

Beyond the immediate financial turbulence lies a potentially more profound geoeconomic shift. Japan has historically been Indonesia’s “preferred partner,” a source of high-quality investment that acted as a crucial counterbalance to China.

From the MRT Jakarta to the massive Patimban Seaport, Japanese capital has underlined Indonesia’s strategic autonomy amid great power competition. However, as the cost of yen-denominated credit rises, the competitive edge of Japanese will be blunted. Japan’s “quality infrastructure” may become a luxury that a more debt-conscious Jakarta may no longer be able to afford.

The most critical area for this shift will be Indonesia’s ambitious nickel-to-electric vehicle (EV) battery pipeline. The sector is the crown jewel of President Prabowo Subianto’s industrial policy, which aims to catapult Indonesia into the top tier of global economies.

Japan’s automotive giants—Toyota, Honda, and Mitsubishi—have long dominated the Indonesian market, but they have all been slow to pivot to EVs, while China has come to dominate the market. Now, burdened by higher capital costs at home, their ability to fund a massive, late-stage transition in Indonesia will be severely hampered.

Every basis point the BOJ adds to its baseline rate is a basis point added to the cost of a Japanese factory in Karawang, Indonesia’s premier industrial and manufacturing hub, making Chinese alternatives like BYD and CATL even more cost-competitive.

This will create a vacuum that Beijing will likely fill with “patient capital” and state-backed financing that is largely indifferent to the BOJ’s moves. As Japanese investment becomes more selective and expensive, Indonesia’s dependence on China for its “green transition” will move from significant to near total.

This, in turn, could herald the beginning of the end of Indonesia’s “free and active” economic foreign policy as reliance on China deepens. If Japan can no longer provide the cheap credit that underpinned its regional influence, Jakarta’s gravity will inevitably shift toward the yuan-centric financial architecture now being built by Beijing.

Looking toward 2026, Indonesia’s financial map will be defined by this “forced integration” with China. As the yen strengthens and Japanese foreign direct investment (FDI) retreats, expect to see a surge in yuan-denominated trade and investment.

The “post-yen” reality for Indonesia is one where the Jakarta-Beijing axis will no longer be a choice but a financial necessity. The BOJ may have raised its rates to save the fast-depreciating yen from oblivion, but the unintended consequence will be the acceleration of Japan’s own obsolescence across the Indonesian archipelago.

In short, the BOJ’s rate hike marks the end of an easy growth era for Indonesia, a period when Jakarta could rely on a steady stream of cheap yen financing to fund its various ambitions.

The path to “Indonesia Golden 2045”, the nation’s centennial vision for strong and sustainable economic growth, is still open but will now be fraught with higher costs, greater volatility and a much deeper dependence on Beijing.

The “Rising Sun” is setting on Japan’s era as Indonesia’s primary underwriter, leaving the archipelago to navigate a more expensive and financially less independent path ahead.

Ronny P Sasmita is senior analyst at Indonesia Strategic and Economics Action Institution.