Why Is the Korean Won Weak While the Japanese Yen Is Rising?

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Recently, in the foreign exchange market, the Japanese yen has shown strength while the Korean won continues to weaken. This is analyzed as the yen strengthening due to expectations of a rate hike by Japan and government intervention in the foreign exchange market, whereas the won is affected by political uncertainties in the U.S. and a weak stock market.

According to the Seoul foreign exchange market on the 29th, around 10 a.m., the yen-dollar exchange rate slightly declined compared to the previous trading day, trading in the 153 yen range. At the beginning of this month, the yen-dollar exchange rate had risen to the 161 yen range but fell about 5% in two weeks. The yen-dollar exchange rate dropping to the 153 yen range is the first time in nearly three months since early May.

The yen is evaluated to have turned strong due to growing expectations of a rate hike by the Bank of Japan (BOJ). The BOJ, Japan's central bank, will hold monetary policy meetings on the 30th and 31st to discuss whether to raise the benchmark interest rate. The BOJ raised the benchmark rate in March, ending its negative interest rate policy after eight years, and is considering an additional rate hike this month.

The increased possibility of a rate hike in Japan and the rising likelihood of a rate cut in the U.S. have also triggered yen carry trade unwinding, contributing to the yen's strength. The yen carry trade involves borrowing yen at low interest rates, converting it to dollars, and investing in dollar assets to earn profits. As the interest rate gap between the U.S. and Japan narrows, yen carry funds are flowing out, pushing up the yen's value.

There was also an impact from the Japanese government's intervention in the foreign exchange market. The Nihon Keizai Shimbun estimated that in mid-month, Japanese foreign exchange authorities injected more than 5 trillion yen (approximately 45 trillion won) into the foreign exchange market to induce yen appreciation.

Shin Yoon-jung, a senior researcher at Kyobo Securities, stated, "Due to the Japanese government's changing view on yen depreciation, expectations of domestic demand recovery, and dollar weakness, the trend of yen value appreciation will continue," adding, "As pressure for yen strength appears, yen carry trade unwinding will also accelerate."

In contrast to the rising yen value, the Korean won remains weak. On the morning of the same day, the won-dollar exchange rate started trading slightly higher at 1,385.5 won compared to the previous trading day. Throughout this month, the won-dollar exchange rate has fluctuated around the yearly high level of about 1,380 won.

The continued weakness of the won is due to increased external political uncertainties in the U.S. and the Middle East. In particular, concerns have arisen that the possible election of former President Donald Trump in the upcoming U.S. presidential election could negatively impact the Korean economy, leading to won weakness.

Moon Da-woon, a researcher at Korea Investment & Securities, explained, "Concerns and uncertainties about Korea's fundamentals such as exports to the U.S. and trade balance after Trump's election may have led to weakened investor sentiment toward the won," adding, "Remaining geopolitical uncertainties, such as recent clashes between Israel and the Yemeni Houthi rebels, are also worrisome factors."

Stock market instability is also a factor in won weakness. Recently, foreigners realizing profits have been net selling Korean stocks, causing the won's value to decline. Park Sang-hyun, a specialist at Hi Investment & Securities, evaluated, "Unlike major currencies, the won-dollar exchange rate has recently risen due to concerns about Trump's administration, foreign investors' selling of domestic stocks, and yuan weakness."

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