By Kim Rahn
Financial authorities are keeping close watch on a massive inflow of Japanese yen into Korea, as they see the financial environment has been ripe for the so-called “yen carry trade.”
It is concerned such an influx could further aggravate the Korean won’s rise and the yen’s fall and further damage the Korean economy, especially the export sector.
The Financial Services Commission Tuesday decided to beef up monitoring on the yen inflow, although the amount is not considered grave for now. The decision comes as the Japanese currency gets weaker and weaker under the Japanese government’s quantitative easing policy, with the exchange rate surpassing 102 yen per dollar on Monday.
The yen carry trade is an interest arbitrage: Investors borrow money in yen from Japan at low interest and invest in other currencies that offer high interest. As Korea’s interest rates are higher than Japan’s, Japanese investors can take huge margins if they buy Korean stocks or bonds.
According to Japan’s Ministry of Finance, Japanese investors net purchased Korean stocks and bonds worth 28.2 billion yen between February and March.
“So far, the yen’s inflow is not at a worrisome level. But if it expands, we may see negative influences such as bubbles in real estate and a rise of the won,” an official of the commission said.
Researcher Park Haesik at the Korea Institute of Finance agreed with the authorities’ view, saying conditions for a yen carry trade have been met.
“First, Japan’s interest rates are almost zero percent while other countries have higher rates. Second, the yen’s depreciation continues: As they borrow money in yen for investment in other currencies, it is beneficial to them if the yen remains weak,” he said.
For the first three months of this year, Japanese investors tended to sell overseas stocks and bonds but invest in the country’s own stock market as stock prices there soared. Such deals brought 7.4 trillion yen back to Japan, preventing the yen’s rapid depreciation.
“But since the middle of April, Japanese investors have been purchasing foreign stocks and bonds. It is a sign of the yen carry trade,” Park said.
The inflow of the yen into Korea is expected to drop the already low won-yen exchange rate, which fell to less than 1,100 won per 100 yen last week for the first time in four years and eight months.
While the falling exchange rate will deal a blow to Korean exporters, experts say there will be more side effects. “Such a carry trade is a short-term investment. The yen can flow out rapidly when the financial environment changes. The sudden outflow can then cause negative influence on foreign currency liquidity,” Park said.
However, there is almost nothing Korea can do to prevent such trading.
“The yen inflow may be suspended if Japan raises interest rates or people stop expecting the yen’s further weakening. But such things are unlikely to happen for now,” said Lee Seung-joon, researcher at Hi Investment & Securities.
“What we can expect is, Japan’s economic fundamentals are improved so that Japanese investors would find merits of the country’s own assets and invest in them. So far, Japanese investors haven’t actively sought a yen carry trade because Japan’s own stock prices have increased rapidly. But when the stock price hiking reaches a limit, the outflow of the yen will begin in full-scale,” he said.