By Lee Hyo-sik
Staff Reporter
Policymakers are increasingly warning that the so-called yen-carry trade could come to an abrupt end and the local financial market could experience a credit crunch.
Lim Young-rok, vice finance and economy minister, said Thursday that the global financial market instability will likely persist for the time being as a result of U.S. subprime loan defaults and that the domestic market should take preemptive measures to deal with the massive outflow of funds from the country.
``Amid the U.S. subprime mortgage risks, a growing number of investors worldwide are shifting focus to cash and other safer assets, shying away from equities and other riskier assets. In the process, many investors, who took out yen-denominated loans to invest in stocks and other assets for higher returns, are paying off loans because of growing financial market uncertainties,'' Lim said.
Under the yen-carry trade scheme, companies and investors have been borrowing the yen from Japanese banks either to use the loans as capital or to invest in stocks and other assets for higher returns by taking advantage of Japan's low interest rates.
However, amid the ongoing market corrections across the globe, fewer investors are borrowing the yen from Japanese banks for equity investments. Also, an increasing number of investors are withdrawing investments in the securities market to pay off yen-denominated loans to avoid higher interest burdens.
Analysts are concerned that the abrupt end of the yen-carry trade could turn equity markets around the world more volatile, bring about possible credit shortage, and make it more difficult for companies to raise funds.
``The size of the yen-carry trade is projected to reach nearly $200 billion worldwide. But we expect the impact (from the yen-carry trade liquidation) on the local financial market to be limited as the yen-carry trade investment in the country is estimated to be only $6 billion,'' Lim said.
Also, Finance and Economy Minister Kwon O-kyu said earlier that the abrupt end of the yen-carry trade could lead to a financial market turmoil, similar to the 1997-98 Asian financial crisis.
``Big confusion such as seen in the Asian financial crisis in 1997 could emerge if investors decide to scrap such trades suddenly. Countries worldwide should join hands to take appropriate actions against surging yen-carry trades to protect the stability of global financial markets,'' Kwon said.
Against the potential credit crunch on the domestic financial market, the other vice finance and economy minister Kim Seok-dong said Thursday that the government will quickly inject money into the country's financial market if a credit crunch materializes because of the U.S. subprime woes.
``The government will closely monitor global financial markets. To prevent the fallout from U.S. subprime woes, we will quickly inject liquidity into markets if any sign of credit shortage emerges.
The European Central Bank, the U.S. Federal Reserve Board and the Bank of Japan have extended a series of emergency funds to financial institutions to prevent a possible liquidity crunch over the past week.