SEOUL, December 19 (AJP) - Japan’s widely expected rate hike to 0.75 percent — the highest level in 30 years — delivered a mild upset to Korean markets, pressuring bond prices and the currency while lifting equities as investors positioned for a stronger yen environment.
Although still low by global standards — compared with Korea’s 2.50 percent policy rate and the U.S. federal funds rate midpoint of about 3.6 percent — the Bank of Japan’s signal of further tightening to combat stubborn inflation near 3 percent marks a turning point for an economy long accustomed to deflation.
For global investors, it also introduces an unfamiliar landscape in which Japanese yields are converging toward international levels.
The benchmark 10-year Japanese government bond yield broke above 2.00 percent for the first time in 19 years following the decision. Korea’s 10-year government bond closed Friday at 3.342 percent, while the U.S. 10-year Treasury yielded 4.139 percent in early session.
Equities advanced in Seoul, with the KOSPI ending Friday 0.65 percent up at 4,020.55 and the tech-heavy KOSDAQ gaining 1.55 percent to 915.27. The dollar rose 2.50 won to 1,479.00 won.
“Given the sharp weakening of the yen, a December rate hike was widely expected, with BOJ officials openly discussing the possibility,” said Cho Yong-gu, an economist at Shinyoung Securities. Long positions in yen futures also reflected that market bet, and Korean bond and foreign-exchange markets were relieved that the period of uncertainty had ended, he added.
Unlike the BOJ’s surprise first rate hike in August last year, Friday’s move — the second following a January increase — was largely anticipated.
Still, Korean financial markets remain exposed to the potential unwinding of the yen carry trade, a strategy that quietly underpinned post-pandemic, liquidity-driven asset inflation. The trade involved borrowing in near-zero-cost yen to invest in higher-yielding assets abroad while Japan kept rates below or near zero even as other central banks tightened policy to curb inflation. That dynamic can reverse abruptly, with destabilizing consequences for emerging markets.
According to Cho, the dollar is currently trading around 155 to 156 yen, and a move beyond 160 yen could trigger a rapid unwinding of carry trades — as seen in August last year when the dollar-yen pair briefly surged to 162.
Korea, where the won has hovered near the 1,480-per-dollar level throughout December, is particularly sensitive to any sudden foreign capital outflows. The currency is already trading at levels associated with past crises.
According to the Bank for International Settlements, Korea’s real effective exchange rate (REER) index fell to 87.05 at the end of November (2020=100), down 2.02 points from a month earlier. That marks the lowest level since April 2009, in the aftermath of the global financial crisis, and comes close to levels seen following the Asian financial crisis in November 1998.
The REER measures a currency’s purchasing power against those of major trading partners.
Korea ranked 63rd out of 64 countries in November, second only to Japan, whose REER stood at 69.4. The won has weakened steadily this year, slipping from the low-90s earlier in 2025 into the 80s by October. With the exchange rate lingering around the 1,480 range this month, analysts warn the REER could fall further.
A weaker real exchange rate also raises the cost of essential imports such as wheat and gasoline, intensifying the burden on households. The Bank of Korea said the import price index rose 2.6 percent month on month in November, extending gains for a fifth consecutive month and marking the sharpest increase since April last year.
Nor does currency weakness necessarily benefit exporters. The Korea Institute for Industrial Economics and Trade estimates that a 10 percent decline in the REER reduces large companies’ operating profit margins by 0.29 percentage points, reflecting Korea’s heavy reliance on imported raw materials and intermediate goods. As the won weakens, manufacturers must pay more dollars for inputs before re-exporting finished products.
According to BOK on Friday, the producer price index rose 0.3 percent month on month and 1.9 percent year on year in November, with coal and fuel prices jumping 5 percent and memory chip prices rising in double digits, driven by higher import costs linked to the weak won.
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