The Financial Supervisory Service projected that there will not be a sharp liquidation of yen carry trades (borrowing cheap yen to invest in assets in countries with higher interest rates), which is a concern in some market circles regarding the Bank of Japan's (BOJ) interest rate hike.
On the 24th, the FSS held a financial situation assessment meeting chaired by Director Lee Bok-hyun to examine the market impact of the BOJ's interest rate hike. The BOJ announced at the monetary policy meeting, which was held for two days, that it will raise the short-term policy interest rate from the current 'about 0.25%' to 'about 0.5%'.
The FSS noted, 'While some in the market are concerned about the recurrence of market shocks due to the sharp liquidation of yen carry trades following last year's BOJ interest rate hike, the incentives for such liquidations are low.'
Yen carry trade is a strategy of borrowing yen at a low interest rate to invest in other countries. Due to the significant difference in interest rates and exchange rates between the United States and Japan, which have maintained a high-interest rate trend, yen carry trades have been frequent. However, with the BOJ raising its benchmark interest rate and the likelihood of the U.S. soon lowering its rates increasing, the liquidation of yen carry trades has started to proceed at a fast pace.
The FSS explained, 'Currently, comparing the financial situation to last July, the BOJ interest rate hike is the same, but last year, the interest rate gap between the U.S. and Japan was narrowing, and the yen was strong; whereas now, the interest rate gap is widening and the yen is weak.'
Director Lee Bok-hyun said, 'After the BOJ's interest rate hike last year, market shocks occurred due to worsening U.S. employment indicators raising recession concerns, so it is essential to closely monitor future changes in external conditions.' Director Lee also stated, 'During the Lunar New Year holiday, global market volatility may increase due to interest rate decisions from the Federal Reserve (Fed) and the European Central Bank (ECB), and the release of U.S. price indicators,' urging to be prepared for any necessary responses.