Investors turn from dollar to yen for FX bets
Japanese yen and U.S. dollar banknotes are seen in this illustration, March 10, 2023. Reuters-Yonhap
Korean investors are turning from the U.S. dollar to the Japanese yen as the won has strengthened against the greenback in recent months, with the won-dollar exchange rate falling from above 1,550 won in the first half of the year to the 1,300-won range.
With the won falling to the 850-won range against 100 yen, near a record low, expectations of a gradual yen recovery are growing, prompting investors to buy the Japanese currency in advance.
Yen deposits at Korea’s five major commercial banks — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup — stood at 1.13 trillion yen as of Tuesday, up 47.8 billion yen from the end of August. The balance had once fallen to 879.6 billion yen in May but has climbed steadily since.
Dollar deposits, meanwhile, have headed in the other direction. The five banks held $69.15 billion, down $7.19 billion from the end of last month. The deposits had been rising steadily after hitting a yearly low of $58.78 billion in March, but that trend reversed this month.
The Bank of Japan (BOJ) raised its policy rate to 1.25 percent on Friday, marking another rate hike since June and bringing the policy rate to its highest level since 1995. But the yen weakened instead as markets viewed the move as less hawkish than expected.
Concerns that the BOJ could struggle to keep pace with the U.S. Federal Reserve in tightening monetary policy have weighed on the yen, while the wide interest rate gap between the United States and Japan has kept the yen carry trade attractive, with investors able to borrow cheaply in yen and invest in higher-yielding assets elsewhere.
The Fed raised its benchmark rate by 25 basis points Wednesday, marking its first hike since July 2023, and signaled the possibility of another increase later this year as inflation remains elevated and oil prices stay high.
The yen also came under pressure as Prime Minister Sanae Takaichi’s administration took a cautious approach to monetary tightening while pursuing an expansionary fiscal policy, reinforcing expectations that Japan would be slow to narrow the rate gap with the U.S.
By contrast, the won has strengthened, supported by heavy dollar selling by exporters amid the semiconductor boom, an improved economic growth outlook and a Bank of Korea rate hike.
But expectations of a sustained yen recovery have grown as the BOJ moves further toward policy normalization and Tokyo and Washington step up coordination to curb excessive yen weakness. That has encouraged investors to buy yen in anticipation of potential currency gains.
Heo Jae-hwan, an analyst at Eugene Investment & Securities, said the shift in currency investment demand toward the yen appears to have been driven largely by signals from the United States and Japan of possible market intervention, along with growing expectations for a weaker dollar.
“Changes in the asset allocation of Japan’s Government Pension Investment Fund will be an important factor to watch for the yen’s future direction,” he said.