[Yen Investment Boom] ① Record-Low Yen... Yen Deposits Soar Alone

Increased Currency Arbitrage Targets and Growing Investment and Tourism Demand

The historic yen depreciation (円低) phenomenon continues, with yen deposits soaring alone. This occurs amid a rising won-dollar exchange rate, which has caused dollar deposit balances to decline. It is interpreted that demand seeking foreign exchange gains centered on the yen, as well as investment and tourism demand, has concentrated.

According to the financial sector on the 7th, the yen deposit balance at the four major commercial banks (KB Kookmin, Shinhan, Hana, Woori) at the end of last month was 953.7 billion yen. This is an increase of 1.6% (15.6 billion yen) compared to the end of the previous month and a 39.3% (374.8 billion yen) increase compared to the year’s low at the end of April.

The rapid rise in yen deposits is thanks to the historically low exchange rate. The Bank of Japan (BOJ) is the only central bank maintaining negative interest rates while central banks worldwide, including the Bank of Korea and the U.S. Federal Reserve (Fed), continue tightening. Although the BOJ raised the yield curve control (YCC) upper limit to 1% at the end of July, it explained this as a measure for accommodative monetary policy.

As a result, the won-yen exchange rate, which was 971.93 won per 100 yen at the beginning of the year, reached 1000.26 won at the end of April and then continued to decline, falling to 903.01 won on the 4th. The Bank of Korea recently stated in a report, "The Bank of Japan maintains an accommodative stance, emphasizing the side effects of a hasty policy shift," and "It is highly likely that the current accommodative monetary policy will continue for a considerable period."

The increase in yen deposits is interpreted as demand seeking foreign exchange gains based on this yen depreciation. Previously, at the end of April when the won-yen exchange rate hit its yearly high, yen deposit balances sharply dropped to 578.9 billion yen, indicating many investors realized foreign exchange gains. Since then, as the exchange rate continued to decline, balances increased by nearly 200 billion yen in July alone, and the upward trend continued last month.

Tourism and investment demand are also factors driving up yen deposits. First, with the COVID-19 pandemic effectively over and overseas travel gradually normalizing, demand for travel to Japan has surged. According to the Ministry of Land, Infrastructure and Transport’s aviation information system, air passengers between Korea and Japan from January to July reached 10.3 million, approaching the pre-COVID-19 level of 13.01 million in 2019.

Investment demand following the emergence of 'Ilhak Gaemi' (individual investors in Japan) also plays a role. The Japanese stock market has been booming due to accommodative monetary policy. Investors aim to gain both capital gains from rising stock prices and foreign exchange gains. According to the Korea Securities Depository, last month, domestic investors’ net purchases of Japanese stocks amounted to about 11 million dollars, a 12-fold increase compared to about 950,000 dollars the previous year.

On the other hand, balances of other foreign currency deposits are showing a declining trend. The dollar, a symbol of safe assets, is struggling due to the high won-dollar exchange rate. At the end of last month, the four major banks’ dollar deposit balance was 55.2 billion dollars, down 3.8% (2.2 billion dollars) from the previous month and 9.8% (6 billion dollars) from the end of January. The recent surge in the won-dollar exchange rate, which is approaching the 1,350 won level, is interpreted as triggering a selling wave by those considering foreign exchange gains.

Although not a major investment asset, the scale of yuan deposits is also shrinking. The four banks’ yuan deposit balance was 6.5 billion yuan, down 26.1% (2.3 billion yuan) from the year’s high in June (8.8 billion yuan). This is interpreted as a result of growing concerns over a prolonged economic downturn in China.

Jung Sung-jin, Deputy Head of KB Kookmin Bank Gangnam Star PB Center, said, "Considering that the average exchange rate after the financial crisis was between 1,050 and 1,200 won for the dollar, it can still be seen as a high range, so it is expected to be observed for a while." He added, "In the case of the yen, although not reaching the 1,000 won level, it is possible to consider foreign exchange gains targeting the 990 won range. Since foreign exchange gains are tax-exempt, it is not a bad choice even for asset holders."