Lee Yeon-woo is a financial journalist at The Korea Times. Her wide range of reporting includes policies, macroeconomics, stock market, companies and even crypto. She is passionate about connecting the dots in Korean finance and making it easier for foreign nationals to understand. Based on her previous experience as a national reporter, she also has a keen interest in social issues within the sector, including gender equality and ESG. Your tips and insights are always appreciated. You can send them to yanu@koreatimes.co.kr.
Weakening yen intensifies pressure on Korean won
Foreign tourists exchange money at a currency exchange shop in Myeong-dong, Seoul, Thursday. Yonhap
By Lee Yeon-woo
Local currency weakens close to 1,470 won per dollar as geopolitical risks, domestic factors mount
The Korean won extended its losses against the U.S. dollar on Thursday, briefly breaching the 1,470 won level and raising concerns that it could test the 1,480 won mark last seen in December during the declaration of martial law, analysts said.
The currency's decline appears to be driven by a combination of factors, including increased outbound investment by Korean investors and persistent uncertainty surrounding Korea's planned $350 billion investment in the U.S.
Yet, one key factor lies beyond the reach of domestic policy: the continued depreciation of the Japanese yen.
The won-dollar exchange rate closed at 1,467.7 won, Thursday, up 2.0 won from the previous day. The currency extended its slide after the market opened, falling to as low as 1,475.2 won by 10:30 a.m. The break above 1,470 marked the first time the won crossed that threshold since April 9, during a period of heightened U.S.-China tensions.
"The yen's weakness is bolstering the dollar, and this offshore dollar buying — long positioning — is adding instability to the won–dollar exchange rate," said Min Gyeong-won, an economist at Woori Bank.
The Japanese yen slipped to the 155-per-dollar range on Thursday, its weakest level in nine months. Expectations that Prime Minister Sanae Takaichi will resist interest rate hikes and pursue expansionary fiscal policies have put additional pressure on the yen. Just two months ago, it hovered around 147 per dollar.
Historically, the yen and won have tended to move in tandem. With Korea and Japan competing across multiple sectors in global export markets, shifts in one currency have often triggered similar movements in the other.
After the COVID-19 pandemic, the won had shown a stronger correlation with the Chinese yuan, especially during the first U.S.-China trade tensions. But as the yuan strengthened in the second half of this year, the won's movements have begun to align more closely with the weakening yen.
According to Marcus Wong, a macro strategist at Bloomberg Intelligence, the 90-day correlation between the yen and the won has climbed to 0.58 last week from 0.21 since the end of March — a notable increase in the context of its three-year history.
"This trend holds over a longer period too, with the won having among the strongest link to the yen in EM (emerging market) Asia, based on five years of weekly data," Wong said. "While the yuan is often cited as a key regional anchor for Asian currencies, the yen has a major impact as well."
The Bank of Korea (BOK) acknowledged this trend in its October Monetary Policy Board minutes, released Nov. 11, noting that "market participants show a tendency to group the two countries together as Asian economies," even though "real-economy and financial-market linkages between Japan and Korea remain quite limited."
With a range of factors pushing the exchange rate higher, volatility is expected to persist. The yen's weakness is likely to continue in the near term as well.
Market participants anticipate that Korea's National Pension Service will begin foreign exchange hedging around the 1,480-won level to support the currency. BOK Gov. Rhee Chang-yong also said Wednesday that authorities are prepared to intervene if they detect signs of excessive volatility.