As expectations rise for a Bank of Japan interest rate hike, the value of the yen has been increasing daily. The dollar-yen exchange rate fell below 150 yen at one point during trading, while the won-yen exchange rate approached 980 won. The rise in the value of the yen is expected to have a positive effect on South Korea's exports and travel balance. However, there is also a possibility of turbulence in international financial markets due to the acceleration of yen carry trade liquidation.
◇ Japan's benchmark interest rate at 0.5%, the highest level since 2008
According to Investing.com on the 2nd, the dollar-yen exchange rate fell to 149.39 yen during trading on the 20th of last month, dropping below 150 yen for the first time since December 9 of last year. It continued to decline and recorded a four-month low of 148.63 yen on the morning of the 26th, the lowest since October 11 of last year. However, on the 28th, following the U.S. announcement of additional tariffs on Mexico, Canada, and China, the exchange rate rose slightly above 150 yen.
The won-yen exchange rate is also soaring. On the 28th, the won-yen official exchange rate skyrocketed to around 979 won per 100 yen, marking the highest level since May 7, 2023 (99.5 won during trading). Considering it dropped to 915 won right after Donald Trump's election in January, this represents an increase of nearly 65 yen within a month.
The rise in the yen's value is attributed to Japan's inflation rate soaring, increasing the likelihood that the Bank of Japan (BOJ) will raise the benchmark interest rate at its monetary policy meeting in the first half of the year. Last month, Japan's consumer price index rose by 4.0% compared to the same period last year, marking its fourth consecutive month of increases since October last year (2.3%). This rate of increase is the largest since January 2023 (4.4%).
If the BOJ raises interest rates, Japan would implement two rate hikes during the first half alone, following the hike in February. The BOJ had previously increased the benchmark interest rate from 0.25% to 0.5% in its February monetary policy meeting. This was the highest level in about 17 years since the global financial crisis in 2008. If further increases bring the rate to 0.75%, it would be the highest in 30 years since 1995.
There are calls within and outside the BOJ to raise the benchmark interest rate to 1%. Naoki Tamura, a committee member, noted on the 6th of last month, "By the second half of 2025 (April 2025 to March 2026), it is necessary to keep the rate at least around 1%." On the 19th, Hajime Takata, another committee member, mentioned the need for additional rate increases, saying, "If the (economic) outlook materializes, it will be time for a gear shift."
◇ Strengthening yen may positively impact Korean exports, but… possibility of a 'Black Monday' reoccurrence
The market is paying attention to the impact that the rising value of the yen will have on the South Korean economy. There are claims that the price competitiveness of the won will increase, leading to improved performance of export companies competing with Japan. According to a report released in December by the Korea Trade-Investment Promotion Agency (KOTRA), Japan is South Korea's largest export competitor, with 9 out of the 10 major export items of both countries overlapping. These include semiconductors, automobiles and parts, ships, and medical, precision, and optical equipment.
There are also suggestions that the travel balance, which has recorded chronic deficits, may improve. According to the Bank of Korea, the travel balance recorded a deficit of $950 million in December last year, worsening compared to the previous month ($760 million deficit). The deficit widened due to seasonal factors like winter travel, but if the yen strengthens, travel to Japan might decrease, which could improve the travel balance.
However, there are concerns about the negative effects of the yen's strengthening. The possibility of yen carry trade liquidation, which shook the financial market last year due to Japan's interest rate hikes, may reoccur. Yen carry trade refers to borrowing low-interest yen to invest in higher-interest currencies like the dollar. Last August, the Bank of Korea analyzed that 32.7 trillion yen (approximately 304 trillion won), which is 6.5% of the total yen carry trade fund balance of 506.6 trillion yen (470.8 trillion won), could be liquidated.
Sang-hyun Park, a researcher at iM Securities, noted, "The strengthening of the yen can have a positive impact on export competitiveness, and there is a possibility that interest previously focused on the Japanese stock market due to the super yen depreciation could be redistributed to Asian countries including South Korea." However, he assessed that "if the dollar-yen exchange rate drops to between 120 and 130 yen, there is a possibility that yen carry liquidation could become more concrete."