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Since being included in the World Government Bond Index (WGBI), foreign net purchases of South Korean government bonds have exceeded 30 trillion won, with a significant portion coming from Japanese funds. Concerns have been raised that an excessive reliance on a specific country could lead to domestic bond yields being influenced by foreign factors.
According to the Ministry of Economy and Finance on June 30, from March 30 to June 26, foreign net purchases of government bonds totaled 30.7 trillion won, an increase from 28 trillion won during the same period last year.
In the three months following WGBI inclusion, Japanese funds accounted for a net inflow of 9.2 trillion won, nearly 30% of the total net purchases. Monthly inflows remained steady, with 3.1 trillion won in April, 2.9 trillion won in May, and 3.2 trillion won in June.
Japan's holdings of South Korean government bonds have also surged to approximately $4.87 billion, a tenfold increase compared to the end of May last year. The balance of government bonds held by Japanese investors grew from 900 billion won at the end of March to 10.1 trillion won as of June 26. The government has actively sought to attract Japanese investors, holding investment briefings in Tokyo for major pension funds, which has accelerated the influx of funds.
A ministry official stated, "Despite increased volatility in government bond yields, foreign net purchases continued from April to June following WGBI inclusion. Various types of investors, including central banks, investment banks, and international organizations, have maintained a steady inflow of foreign funds."
Market analysts believe that the high proportion of Japanese funds does not significantly raise concerns about short-term withdrawals. Much of the Japanese investment is considered passive capital aimed at adjusting to the WGBI inclusion, or it has a medium- to long-term investment nature, limiting the likelihood of sudden exits typical of short-term borrowing.
Park Sang-hyun, a researcher at iM Investment & Securities, noted, "Japanese funds should be viewed as capital that has entered to fill a certain quota due to WGBI inclusion. Since it is characterized more by medium- to long-term investments rather than short-term loans, the high proportion of Japanese funds alone does not pose a risk of rapidly increasing domestic bond market yields."
However, potential changes in interest rates by the Bank of Japan or fluctuations in yen hedging costs are seen as direct factors influencing Japanese investment in domestic bonds. If interest rates rise in Japan, the relative attractiveness of investing in won-denominated bonds could diminish, which could translate into volatility in domestic yields given the current structure's high reliance on specific countries.
Concerns have also been raised that if the effects of WGBI inclusion are limited to initial passive inflows from Japan, the additional inflow of active global investors, who are sensitive to interest rates, exchange rates, and hedging costs, may be slow, potentially reducing future purchasing power.
Kim Jeong-sik, an emeritus professor at Yonsei University, stated, "Currently, Japanese funds have a strong long-term investment character, so the likelihood of shaking the market in the short term is low. However, it is important to note that if the proportion of foreign investment from a specific country becomes excessively high in the long term, domestic bond yields could be significantly influenced by the investment decisions of foreign investors."
According to the Ministry of Economy and Finance on June 30, from March 30 to June 26, foreign net purchases of government bonds totaled 30.7 trillion won, an increase from 28 trillion won during the same period last year.
In the three months following WGBI inclusion, Japanese funds accounted for a net inflow of 9.2 trillion won, nearly 30% of the total net purchases. Monthly inflows remained steady, with 3.1 trillion won in April, 2.9 trillion won in May, and 3.2 trillion won in June.
Japan's holdings of South Korean government bonds have also surged to approximately $4.87 billion, a tenfold increase compared to the end of May last year. The balance of government bonds held by Japanese investors grew from 900 billion won at the end of March to 10.1 trillion won as of June 26. The government has actively sought to attract Japanese investors, holding investment briefings in Tokyo for major pension funds, which has accelerated the influx of funds.
A ministry official stated, "Despite increased volatility in government bond yields, foreign net purchases continued from April to June following WGBI inclusion. Various types of investors, including central banks, investment banks, and international organizations, have maintained a steady inflow of foreign funds."
Market analysts believe that the high proportion of Japanese funds does not significantly raise concerns about short-term withdrawals. Much of the Japanese investment is considered passive capital aimed at adjusting to the WGBI inclusion, or it has a medium- to long-term investment nature, limiting the likelihood of sudden exits typical of short-term borrowing.
Park Sang-hyun, a researcher at iM Investment & Securities, noted, "Japanese funds should be viewed as capital that has entered to fill a certain quota due to WGBI inclusion. Since it is characterized more by medium- to long-term investments rather than short-term loans, the high proportion of Japanese funds alone does not pose a risk of rapidly increasing domestic bond market yields."
However, potential changes in interest rates by the Bank of Japan or fluctuations in yen hedging costs are seen as direct factors influencing Japanese investment in domestic bonds. If interest rates rise in Japan, the relative attractiveness of investing in won-denominated bonds could diminish, which could translate into volatility in domestic yields given the current structure's high reliance on specific countries.
Concerns have also been raised that if the effects of WGBI inclusion are limited to initial passive inflows from Japan, the additional inflow of active global investors, who are sensitive to interest rates, exchange rates, and hedging costs, may be slow, potentially reducing future purchasing power.
Kim Jeong-sik, an emeritus professor at Yonsei University, stated, "Currently, Japanese funds have a strong long-term investment character, so the likelihood of shaking the market in the short term is low. However, it is important to note that if the proportion of foreign investment from a specific country becomes excessively high in the long term, domestic bond yields could be significantly influenced by the investment decisions of foreign investors."
* This article has been translated by AI.
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