The values of the South Korean won and the Japanese yen have fallen to their lowest levels in decades, but the Nikkei reports that South Korea has greater policy flexibility to respond to this currency weakness than Japan. While the Bank of Korea has left the door open for further interest rate hikes, concerns persist in Japan that the government is trying to restrain the Bank of Japan's ability to raise rates.
On July 10, the Nikkei noted that the simultaneous depreciation of the won and yen is driven by common factors, including interest rate differentials with the U.S., capital outflows from domestic markets, and foreign currency earnings not returning to their home countries. The won-dollar exchange rate has recently risen to around 1,500 won, the highest level in nearly 17 years since 2009. The yen-dollar exchange rate has also climbed to the mid-162 yen range, marking its highest point in approximately 39 and a half years. Since the beginning of the year, the won has depreciated by about 4% against the dollar, while the yen has fallen by about 3%.
In South Korea, despite a surge in memory semiconductor exports driven by global investments in artificial intelligence (AI), the value of the won continues to weaken. The Nikkei explained that ongoing capital outflows are fueled by the expansion of overseas investments by the National Pension Service and individual investors, along with a trend among companies to retain their dollar earnings from overseas operations rather than converting them to won. According to the Financial Times, major corporations like Samsung Electronics and SK Hynix are increasingly holding their overseas profits in dollars instead of converting them to won. Toru Nishihama, chief economist at Dai-ichi Life Research Institute, stated that South Korean companies find investing in the U.S. and other markets more profitable than the domestic market, which is facing bleak prospects due to a declining population.
The rise in the South Korean stock market, which might seem beneficial for the won, is also contributing to its weakness. Goh Ying, a foreign exchange analyst at Nomura Securities, explained that the surge in stock prices has increased the proportion of South Korean stocks in foreign investors' portfolios, leading them to sell stocks to avoid excessive concentration. According to the Financial Supervisory Service, foreign investors have net sold over 100 trillion won worth of South Korean stocks from the beginning of the year until May, marking the largest amount on record. When foreigners convert the proceeds from stock sales into dollars, it increases demand for dollars and contributes to the rise in the exchange rate.
In Japan, individual overseas investments are also exerting downward pressure on the yen. The number of people investing in overseas stocks and funds through the NISA tax-exempt investment scheme has been steadily increasing, creating consistent demand for foreign currencies. The Nikkei pointed out that the structural issue of domestic funds flowing abroad and foreign earnings not being converted back into local currency is exacerbating the weakness of both the won and the yen.
However, the Nikkei highlighted a clear difference between South Korea and Japan regarding the relationship between government and central bank monetary policy. The South Korean government has not made any significant statements to restrain the Bank of Korea's monetary policy, which is keeping the possibility of further interest rate hikes open. Bank of Korea Governor Rhee Chang-yong stated on July 9 that he believes it is necessary to raise the policy rate at an appropriate time. The next monetary policy committee meeting is scheduled for July 16.
In contrast, there is a prevailing view in Japan that the government is attempting to restrain the Bank of Japan from further rate hikes. A draft of the Japanese government's basic policy on economic and fiscal management, released at the end of last month, included a phrase stating that the 'appropriate operation of monetary policy' by the Bank of Japan is 'very important.' This led to interpretations that the Takaiichi government, which is pursuing expansionary fiscal policies, may be trying to put the brakes on interest rate increases. Although the Japanese government later decided to revise that phrase, doubts remain. Takahiro Hori, a senior market economist at Mizuho Bank, predicted that as long as the perception persists that the Takaiichi administration is reluctant to support interest rate hikes by the Bank of Japan, concerns about the central bank's independence could lead to the yen remaining weaker than the won.
* This article has been translated by AI.
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