Yen’s Sharp Rally Drives 20-Won Drop in Exchange Rate... Three Key Variables Ahead

US-Japan FX Policy Coordination: US Action and Vigilance for Potential Japanese Intervention
Strong Yen Expected to Persist in the Mid-150 Yen Range
Government Demonstrates Strong Commitment to FX Market Stability
Focus on Possible Asset Allocation Changes by the National Pension Fund Management Committee

The Korean won to US dollar exchange rate opened sharply lower on January 26, driven by the Japanese yen’s rapid appreciation, which was triggered by coordinated foreign exchange policy moves between the US and Japan. Experts noted that the extent of further yen strength will be a key factor in determining whether the won-dollar rate will continue to decline in the near future. In addition, with the government demonstrating a strong commitment to stabilizing the foreign exchange market, whether the National Pension Fund Management Committee will revise its asset allocation strategy is also expected to be a crucial variable.

On the 26th, dealers are working in the dealing room at the Hana Bank headquarters in Jung-gu, Seoul.

On January 26, the won-dollar exchange rate began trading at 1,446.1 won, down 19.7 won from the previous session, in the Seoul foreign exchange market. This is the lowest opening level since January 6, when it stood at 1,445 won. The won-dollar rate has been falling for four consecutive trading days since President Lee Jaemyung stated on January 21 that "the exchange rate will fall to around 1,400 won within a month or two." As of 10:09 a.m. on this day, the rate had dropped to 1,443.2 won, and as of 10:26 a.m., it was fluctuating around the 1,446 won mark.

The sharp drop in the won-dollar exchange rate on this day was largely due to the significant rise in the value of the yen over the weekend. On January 23, the Federal Reserve Bank of New York conducted a rate check survey with London foreign exchange market dealers. In a situation where 24-hour foreign exchange market quotes are released in real time, such rate checks are either to confirm the effectiveness of intervention just before action is taken or to signal the authorities' intentions to the market. As a result, the yen-dollar rate, which had approached 160 yen last week, plunged on January 23 and fell to the low 155 yen range on this day. Kwon Amin, a researcher at NH Investment & Securities, explained, "There was caution about intervention by Japanese authorities near the 160 yen level, but its effectiveness was limited. Ultimately, the involvement of the New York Fed, which can be seen as the US foreign exchange market execution arm, indicates either clear policy coordination between the two countries or, at the very least, an implicit intention on the part of the US."

Experts believe that the duration of the yen’s further appreciation, following the US-Japan foreign exchange policy coordination signals, will be a key variable for the direction of the won-dollar rate. Researcher Kwon pointed out, "Japan is the largest holder of US Treasuries, and since COVID-19, the proportion of US equities in its foreign investments has also increased significantly. If the US takes direct intervention, there is a possibility of Japanese capital being repatriated. However, it is more likely that, as in 2022 and 2024, the Bank of Japan will remain vigilant about intervention within the context of US action, rather than the US directly intervening." In this scenario, a strong yen in the mid-150 yen range is likely to persist, which could also influence the decline of the won-dollar rate in tandem.

The easing of 'Sell America' concerns, as President Donald Trump adopted a more conciliatory stance regarding the previously tense Greenland situation, also contributed to the weakening of the dollar. Park Sanghyun, a researcher at iM Securities, said, "If the yen continues to strengthen, expectations for further dollar weakness will spread," adding, "This week, the foreign exchange market will pay more attention to the appointment of the next Federal Reserve Chair and the potential recurrence of a federal government shutdown (temporary suspension of government operations) than to the first Federal Open Market Committee (FOMC) meeting of the year."

The outcome of the National Pension Fund Management Committee meeting is also a major variable that could significantly impact the won-dollar exchange rate. On this day, the National Pension Service will convene its first Fund Management Committee meeting of 2026 to review its fund management strategy. It is reported that the agenda will include proposals to reduce the proportion of overseas investments and increase domestic investments, as well as to raise the hedge ratio. Moon Hongchul, a researcher at DB Securities, noted, "The previously set asset allocation target for the end of 2026 was 14.4% (plus or minus 5 percentage points) for domestic equities, but it is highly likely that this ceiling has already been exceeded. If the share of domestic asset allocation is increased at this Fund Management Committee meeting, in a situation where the President's commitment to foreign exchange market stability has been confirmed, it will have a significant impact on stabilizing the won-dollar exchange rate, in addition to the US-Japan coordinated intervention in the yen-dollar market."