Employees work at the dealing room of Hana Bank in Jung-gu, Seoul, on Monday, as the Kospi opened more than 3 percent lower after surging to a record high in the previous session. [Yonhap]
Employees work at the dealing room of Hana Bank in Jung-gu, Seoul, on Monday, as the Kospi opened more than 3 percent lower after surging to a record high in the previous session. [Yonhap]

A surprise currency coordination move by US and Japanese monetary authorities sent the yen-dollar rate tumbling below 160 yen, rattling South Korea's foreign exchange and capital markets. The yen's sharp appreciation pushed the won-yen rate higher, reviving expectations of renewed won-yen correlation and intensifying downward pressure on the won-dollar rate. Concerns are mounting that an unwinding of yen carry trades could accelerate foreign capital outflows from the domestic stock market.

Financial industry sources said Monday that as the US and Japanese governments moved jointly to curb the yen's excessive weakness, wariness over a potential yen carry trade unwind has risen sharply across global financial markets.

Yen carry trading involves borrowing in low-interest-rate yen and investing the proceeds in higher-yielding overseas assets. If the yen strengthens sharply, investors may rush to sell risky assets such as equities to repay their yen-denominated borrowings. In that process, the foreign exchange and stock markets of South Korea and other emerging economies could face sudden and severe capital outflows.

The yen-dollar rate had surged in recent weeks as yen selling — driven by the expansionary fiscal stance of the Takaichi Sanae cabinet — combined with dollar buying fueled by instability in the Middle East. By late last month, the rate had approached 164 yen, pushing the yen to its weakest level in roughly 40 years.

In response, the US and Japanese governments intervened heavily in the foreign exchange market to defend the yen, a move analysts said was partly aimed at facilitating Japan's investment commitments to the United States. Following the joint intervention, the yen-dollar rate tumbled to the high 150s.

US President Donald Trump acknowledged the intervention, saying Japan "had a weak yen and needed a little help." Japanese Finance Minister Katayama Satsuki said Tokyo would "not hesitate to conduct further joint intervention if necessary."

The yen's sharp rise also shook South Korea's foreign exchange market. Some market participants view the move as a trilateral currency coordination among South Korea, the United States and Japan — noting that when the yen-dollar rate plunged on the morning of Friday, July 31, the won-dollar rate also fell to 1,418 won, its lowest level in nine months.

The won-dollar rate dipped to 1,431.5 won around 9:05 a.m. Monday before trading near 1,432 won around 9:30 a.m. Park Sang-hyun, a researcher at iM Securities, said the US Treasury has "ample room to strengthen coordination to stabilize the foreign exchange market, ensuring that South Korean and Japanese investment commitments to the United States proceed smoothly for now."

Analysts say the correlation between the won and the yen could strengthen going forward. The two currencies had moved increasingly out of step as the yen weakened sharply in recent months, but the US-Japan currency coordination could push them back in the same direction — which would in turn add further downward pressure on the won-dollar rate.

A senior official at the foreign exchange authority said that if the won and yen move in tandem following the US-Japan coordination and the won strengthens as a result, "it would indeed act as downward pressure on the won-dollar rate," while adding that "the direction going forward will depend on which force proves stronger." Park said the won is expected to "continue its strengthening trend," with the near-term trajectory of the yen-dollar rate set to be "a major variable."

The won-yen rate, meanwhile, faces upward pressure. According to the Bank of Korea, the rate stood at 952.3 won early this month before declining steadily, falling below 900 won on July 24 to reach 896.8 won and dropping further to 887.9 won on Thursday, July 30. It rebounded sharply the following day, climbing back above 900 won to 902.1 won on Friday, July 31. On Monday, the rate surged to 918.78 won shortly after the market opened at 6:46 a.m., then pulled back to 907.3 won around 9:15 a.m. before spiking again to trade near 917 won around 9:30 a.m.

The official said that even if the won and yen move in correlation, "if the yen strengthens relatively more, it will act as upward pressure on the won-yen rate." However, factors supporting won strength — including SK Hynix's American depositary receipts — remain in play, and the won-yen rate is expected to see significant volatility for some time.

Uncertainty in the domestic stock market has also grown. If pressure to unwind yen carry trades intensifies, foreign capital outflows from South Korean equities — classified as a risk asset — could deepen. Volatility in the virtual asset market may also increase.

There are several precedents for yen carry trade unwind fears dragging down the Kospi. Most notably, when the Bank of Japan surprised markets with a 0.25 percentage point policy rate hike in July 2024 and carry trade unwinding fears peaked, the Kospi tumbled on Sept. 5 of that year, triggering a circuit breaker.

The Kospi opened Monday at 6,358.27, down 237.18 points, or 3.6 percent, from the previous session. As of 9:30 a.m., foreign investors had net sold more than 1.1 trillion won ($767 million) worth of shares on the Kospi.


kimstar@heraldcorp.com