"Yen Strength to Drive Won Appreciation"... FX Market on Alert as Japan Steps Up Intervention [Weekend Money]

Encouraging Government Bond Purchases to Defend the Weak Yen
Attractive Long-Term Japanese Bond Yields
Yen Carry Trade Funds Returning Home

In response to the recent surge in government bond yields and the historic depreciation of the Japanese yen, the Japanese government has been gradually intensifying its interventions in both the bond and foreign exchange markets. Analysts indicate that if the yen strengthens in the future, it could amplify the extent of the Korean won’s appreciation in the domestic foreign exchange market.

An employee is organizing Japanese yen and US dollars at Hana Bank's Counterfeit Currency Response Center in Jung-gu, Seoul. Photo by Yonhap News Agency

According to iM Securities, the Japanese government is currently focused on stabilizing government bond yields and, more broadly, ensuring the stability of the bond market. Their strategy involves encouraging increased investment in Japanese government bonds by Japanese asset holders, which would drive down yields and, in turn, help defend against the yen’s weakness.

In fact, last week, Japanese Finance Minister Satsuki Katayama announced plans to encourage Japan’s Government Pension Investment Fund (GPIF)—the world’s largest pension fund—to expand its investments in Japanese financial assets. Kenichiro Eno, Minister of Health, Labour and Welfare, also mentioned that, if necessary, the ministry would consider revising GPIF’s basic portfolio. Furthermore, the finance minister revealed intentions to include government bonds in the NISA program, a non-taxable small investment program, thereby encouraging household funds to flow into government bonds.

The Japanese government’s urgent push to increase the proportion of government bond investments is due to mounting fiscal burdens and additional upward pressure on bond yields, triggered by the Takaichi Cabinet’s large-scale roadmap for AI investment—which is expected to total approximately 370 trillion yen by 2040. Mere foreign exchange intervention is no longer sufficient to contain the super-weak yen; instead, there is a pressing need to fundamentally shift capital flows by attracting Japanese funds back into the domestic market.

Currently, the yield on Japan’s 10-year government bonds stands at 2.79%, while the 30-year bond yield is 3.91%, making long-term bonds particularly attractive for investors. iM Securities noted that although statements from the Japanese government regarding expanded bond investment may not immediately trigger a dramatic shift in global capital flows, the attractive yield levels provide ample room for a gradual return of yen carry trade funds to Japan.

If Japanese funds begin increasing their share of domestic investments, this will inevitably have a significant impact on the global financial market. Even if it does not trigger a system-wide shock such as a sudden unwinding of yen carry trades, large-scale selling of major developed market government bonds by Japanese investors could push global bond yields higher. Ultimately, this would lead to upward pressure on the yen’s value.

Park Sanghyun, researcher at iM Securities, stated, “The proportion of Japanese funds allocated to investment assets will affect not only the domestic bond market, but also the Korean won.” He added, “In the current environment, where the appreciation of the won has been accelerated by improved dollar liquidity following the listing of SK hynix American Depositary Receipts (ADR), further strengthening of the yen would add pressure for the won to gain even more ground.”

This content was produced with the assistance of AI translation services.