Value context and insight. lkm@koreatimes.co.kr
Yen carry trade reverses to heighten stock market volatility
gettyimagesbank
By Lee Kyung-min
Sidecar activated by surging KOSPI
The Korean stock market is likely to experience greater-than-expected volatility, rattled by the global unwinding of both yen carry trades and long positions in U.S. artificial intelligence (AI) shares, market watchers said Tuesday.
Advancing this view is the rapid 12 percent month-to-date appreciation of the Japanese currency underpinned by the Bank of Japan's monetary tightening. This has led to the forced liquidation of yen carry trades where borrowers of ultra-low yen with high-return global asset holdings are facing margin calls. A failure to meet these calls to provide cash to offset falling asset values leads to forced sale of underlying assets.
Also strengthening the yen is the narrowing yield differential between U.S. and Japanese long-term bonds, accelerated by anticipations of U.S. Federal Reserve rate cuts and the Japan's central bank dialing back debt buying to reduce market liquidity, a form of monetary tightening.
Chain reaction
“It is a chain reaction of fear-driven, risk-averse sentiment,” said Standard Chartered Bank Korea senior investment strategist Hong Dong-hee.
The strengthening yen has significantly altered the prevailing global market trend long defined by balanced short yen depreciation positions and long positions in the Magnificent 7 (M7) equities. They are shares of Microsoft, Apple, Alphabet, Amazon, Nvidia, Meta and Tesla.
“The short yen position was liquidated rapidly over the past week since the BOJ's tightening late last month. Also wound up were years of weak yen positions. The sudden sell-off prompted many investors to join the wave of reducing overall exposure to the yen along with other M7 investment portfolio adjustments,” he said.
The seven shares lost $2.6 trillion (3,550 trillion won) in market capitalization over the past three weeks, with individual losses ranging from 9 percent to 23 percent.
The potential market impact from Korea’s yen carry trade liquidation is expected to be limited, as indicated by the total exposure of 38.7 trillion yen, including spot and futures yen trading as well as borrowings.
Financial Supervisory Service Governor Lee Bok-hyun said Thursday that while yen investments in Korea are "not significant," attempts to liquidate yen carry trades "could increase market volatility." Japanese investments constitutes only about 0.6 percent of the KOSPI's market capitalization and 0.03 percent of Korea's bond market.
Hong said Monday’s market rout was propelled by a collective plunge in futures and spot trading.
“Foreign and institutional investors across the board pulled back, leading to a midday market crash of over 11 percent. Weak U.S. labor market data, indicative of a potential recession, triggered a ripple effect throughout the global markets.”
The Korean stock market experienced a side car, a five-minute trading suspension, at around 9:06 a.m., Tuesday, after KOSPI 200 futures gained over 5 percent for more than one minute. It is activated when the futures index loses or gains over 5 percent, or when the Kosdaq index sees a fall or gain of at least 6 percent for one minute or longer.
The five-minute halt was not nearly as significant as Monday’s 20-minute trading halt triggered by a circuit breaker.
Deputy Prime Minister and Finance Minister Choi Sang-mok said Monday’s equity market rout does not pose a significant concern to the economy, as evidenced by stable trading in local stock exchanges, foreign exchange, and bond markets.
“Foreign exchange and funds flows show stable movements, amid the country’s gradual recovery,” he said during a meeting of financial authorities. “Market participants should make sound decisions, mindful of excessive unwarranted anxiety.”
The KOSPI closed at 2,522.15 points, up 3.3 percent from the previous session.