Suddenly Expensive Yen... Strong Trend Expected to Continue for a While

Possibility of Continued Yen Strength as US-Japan Interest Rate Gap Narrows

An employee is organizing Japanese yen at the Hana Bank Counterfeit Response Center in Jung-gu, Seoul. Photo by Jinhyung Kang aymsdream@

The value of the yen, which has been strong since July, is expected to continue its strong trend against the US dollar in the future.

According to the Bank of Korea's Monetary and Credit Policy Report on the 15th, the yen, which had shown a trend of weakening since the end of 2012, reversed to a strong trend starting in July this year.

This is analyzed to be due to increased expectations that the US Federal Reserve will accelerate its rate cuts, while the Bank of Japan continues to raise rates, leading to expectations of a narrowing interest rate gap between the US and Japan, which strengthened the yen.

Factors contributing to the yen's strength also include the rapid unwinding of yen carry trades due to the expected narrowing of the US-Japan interest rate gap, and increased foreign exchange demand as Japanese funds invested in the US stock market returned amid concerns over a US economic recession.

The report evaluated that the yen is expected to maintain a strong trend against the US dollar for the time being, and that additional appreciation pressure could occur if risk aversion sentiment spreads.

The current policy interest rate gap between the US and Japan, which is 5.25 percentage points, is expected to narrow by more than 75 basis points (1bp=0.01 percentage points) by the end of the year, increasing the repatriation of Japanese global bond investment funds to their home country, which could put strong appreciation pressure on the yen.

However, it is expected that the possibility of a sharp drop in the yen-dollar exchange rate due to capital flight is low, as a significant portion of the oversold positions in yen futures has recently been unwound, and the absolute interest rate gap between Japan and other countries remains large.

Accordingly, it was assessed that the negative impact of the yen's strength on the won-dollar exchange rate and domestic capital inflows and outflows will not be significant.

A Bank of Korea official stated, "In Korea's case, there has not been much inflow of yen carry trade funds, and the scale of yen borrowing is not large, so even if yen carry trades are unwound and Japanese funds are repatriated, the direct impact will be limited," but added, "It is necessary to be cautious as increased global uncertainty and amplified volatility in international financial markets could raise pressure for capital outflows by foreigners."

Meanwhile, despite the outlook for a strong yen, demand for travel to Japan by Koreans continues. According to the Ministry of Land, Infrastructure and Transport's Aviation Information Portal System, more than 2 million Korean travelers visit Japan every month.

The popularity of travel to Japan is expected to continue during the Chuseok holiday as well. On the 11th, Incheon International Airport Corporation conducted a '2024 Chuseok Holiday Overseas Travel Intention Survey' targeting nationals using Incheon Airport, and Japan was chosen as the most preferred travel destination at 31.1%.