For the past 34 years, Japan has held a pretty impressive title. It was the world’s largest creditor. Simply put, this means that Japan has more money than it lends to the world, or more assets than foreigners have in Japan.

See, countries can invest abroad just like people do. They can lend money, buy foreign government bonds, buy companies abroad, or own property in other countries. It’s all part of what’s called “net foreign assets.” Basically, what a country has abroad is minus what others have inside their borders, and for more than three decades, Japan has had the largest net positive balance. The rest of the world owed Japan the most. But a few days ago, that long-standing record was broken. Germany has quietly climbed to the top of the ladder, pushing Japan into second place.

Now, here’s the thing. Japan’s net foreign assets are actually set to reach an all-time high in 2024. It was up 13% from the previous year, reaching ¥533 trillion (about $3.7 trillion). However, Germany outpaced that, reaching ¥569 trillion (about $3.9 trillion). So while Japan grew, Germany grew faster. How did that happen, you might ask?

First of all, exports had a lot to do with it. In 2024, Germany recorded a current account surplus of around €240 billion (about $250 billion), which was about 9% higher than the previous year. If you’re wondering what a current account surplus is, it’s when a country exports more than it imports. Germany did exactly that. Yet, strangely enough, Germany’s exports weren’t actually booming. They were down 1% compared to 2023. But its imports were down even more—3%. So while both exports and imports have fallen, the gap between them has widened, and it’s that gap, that surplus, that’s what matters. More surplus means more money to invest abroad, and more overseas investment means more net foreign assets.

Japan, on the other hand, also reported a strong current account surplus — about ¥30 trillion (or about €180 billion). That was actually its highest level since 1985. But it still lags behind Germany, which brings us to the second factor: currency movements. Look, Germany’s currency, the euro, isn’t just affected by what happens in Germany. It’s tied to the entire eurozone. By 2024, the euro has strengthened by about 5% against the yen. That means the euro can now buy more yen than it used to.

So when Japan’s net foreign assets were calculated in yen, the value of Germany’s euro-denominated assets looked bigger, simply because of the currency effect. It increased Germany’s position in yen, even if the real difference wasn’t that big. In short, Japan didn’t fall behind because it performed poorly. It was just the exchange rate math that played in Germany’s favor.

If you’re wondering why the euro has been gaining strength against the yen, it’s because of a series of things happening at the same time. One big driver is interest rates. For example, Japan and the US have very different approaches to interest rates. While the US has kept interest rates high to combat inflation, Japan has kept them near zero or even negative. This has made Japanese investments less attractive to global investors. People have started moving their money elsewhere in search of better returns, putting downward pressure on the yen.

Japan’s own economy hasn’t helped either. Growth has been sluggish in 2024, household spending has been weak, and domestic demand hasn’t really picked up. All of this has made Japan a less attractive place to invest, especially compared to countries like the US, where consumer spending keeps the economy buoyant.

There’s also a deeper structural problem: Japan’s aging population. With more retirees and fewer young workers, the country has high savings but not much room to invest them productively at home. That’s why Japanese institutions, banks, pension funds, insurance companies, are sending this money abroad. But they’re usually doing it in very careful ways, like buying US government bonds. These are low-risk investments but also offer low returns.

On the other hand, Japanese firms are shifting more money into direct investments; not into easily bought and sold securities like stocks or bonds, but into buying companies or setting up businesses abroad. Unlike German investors, who have more liquid foreign assets, Japanese purchases are harder to sell quickly. This limits flexibility, especially during economic shocks. So, does Japan have a chance of regaining its top spot?

If you ask Japanese Finance Minister Katsunobu Kato, he doesn’t seem too bothered by the drop to second place. According to him, Japan’s overseas assets are still climbing steadily and have actually reached a record high. So being in second place doesn’t mean that Japan’s financial health or global influence is under threat. He believes that as long as the numbers are increasing, Japan is doing just fine. But here’s the thing. Getting back to the top may not be so easy.

For starters, Japanese companies are under pressure to shift production to the US. Thanks to the tariff war launched by Trump. When a company sets up shop abroad, it usually leads to higher liabilities for its home country. That’s because the money flowing out is considered Japan’s investment in a foreign entity or an increase in its assets. But that doesn’t automatically increase what foreigners have in Japan. Also, if Japanese companies borrow from foreign banks or investors to build those factories, that borrowing will increase Japan’s liabilities.

Germany, on the other hand, may not face the same problems and can reach the summit more easily because it falls under the EU’s broader trade umbrella. However, Germany is not completely safe either. If the US decides to impose tariffs on German cars next, its export-oriented model could be hit, as the US is the largest export market for German carmakers Volkswagen, BMW and Mercedes. This could slow down asset accumulation. Still, Japan has a few advantages.

Take the Shunto wage increases, for example. Every spring, Japanese unions meet with employers to negotiate wage increases. By 2025, this could translate into an average 5.4% increase in wages. That’s a reasonable jump.

More money in people’s pockets could mean more spending and more saving. Here’s the interesting part. Some of these savings could go to overseas investments. Thanks to a government-backed program called NISA (Nippon Individual Savings Account), ordinary people are encouraged to invest in foreign stocks and funds. If it holds, it could help boost Japan’s net foreign assets once again. But there’s another development.

The Bank of Japan (BoJ) has decided to slow down its rate hikes this year. Initially, gradual increases were expected to make the yen a little stronger for Japanese investors and foreign purchases a little cheaper. But with the uncertainty surrounding Trump’s presidency and the looming tariff wars, the BOJ is being cautious. For now, they’ve held off on most hikes. Only a modest 0.25% increase is expected by the end of the year. So, yes, everything is a bit up in the air. For now, the world’s largest creditor crown is sitting on Germany’s head. Whether Japan will bounce back or settle comfortably into second place remains to be seen.