Following the joint foreign exchange market intervention by the United States and Japan, market attention has shifted to the potential unwinding of the yen carry trade. A large-scale unwinding could increase volatility in global financial markets and impact domestic stock prices and exchange rates.
Growing Concerns Over Yen Appreciation
As of 3:30 PM on August 4 in the New York foreign exchange market, the yen-dollar exchange rate fluctuated in the 157 yen range. The rate, which exceeded 163 yen on July 25, has stabilized following the U.S.-Japan intervention, leading to a stronger yen.
The yen carry trade involves borrowing yen at Japan's ultra-low interest rates to invest in assets with relatively higher returns, such as U.S. stocks, bonds, and emerging market assets. This strategy has been a hallmark of global investment for decades, rooted in Japan's prolonged low-interest policy.
The concern arises when the value of the yen rises rapidly. Investors may sell off overseas assets to repay borrowed yen, leading to increased volatility in U.S. stock and bond markets, as well as in emerging market financial systems.
Historically, large-scale unwinding of the yen carry trade has occurred during the 1998 Asian financial crisis, the 2008 global financial crisis, and the 2020 COVID-19 pandemic, resulting in significant capital outflows. With the carry trade estimated to be worth trillions of dollars, a substantial unwinding could sharply reduce global liquidity.
The domestic financial market is not immune to these developments. As yen carry funds have also flowed into South Korean stocks and bonds, a significant unwinding could lead to foreign capital outflows, increased volatility in the KOSPI, and upward pressure on the won-dollar exchange rate.
Indeed, on August 5, 2024, the Nikkei 225 index plummeted by 12.4% in a single day amid fears of a strong yen and a U.S. economic downturn. On the same day, the KOSPI fell by 8.8%, marking its largest drop since the global financial crisis, with intraday losses reaching 10.8%, triggering a circuit breaker. The U.S. Nasdaq index also experienced a significant drop of around 6% during the day, indicating widespread turmoil in global financial markets.
However, some analysts believe the likelihood of a large-scale unwinding of the yen carry trade is limited this time. The scale of the carry trade has decreased compared to the past, and market participants have largely priced in the potential for yen appreciation.
Kim Jeong-sik, an emeritus professor of economics at Yonsei University, stated, "If yen carry funds are unwound in the U.S. and flow back to Japan, it could lead to a weaker dollar and a stronger yen. However, the amount of yen carry funds that have entered South Korea is not substantial, so the direct impact on domestic exchange rates may be limited."
Will Export Dynamics Change? Sector-Specific Impacts Expected
If the yen continues to strengthen, the fortunes of South Korean export companies are likely to vary by sector. Industries competing with Japanese firms may benefit, while those heavily reliant on Japanese materials, parts, and equipment could face increased cost pressures.
The automotive sector is expected to be a primary beneficiary. A stronger yen could weaken the price competitiveness of Japanese automakers, potentially improving the relative competitive position of South Korean companies like Hyundai and Kia.
In contrast, the impact of yen appreciation on key export sectors such as semiconductors is expected to be limited. Analysts argue that global demand and market conditions driven by increased investment in artificial intelligence (AI) will play a more significant role in determining performance, reducing the influence of exchange rate fluctuations compared to the past. Additionally, as South Korean companies increase their overseas production, the historical correlation between yen strength and overall export competitiveness is weakening.
However, industries with a high dependency on Japanese materials and components may face rising cost burdens due to yen appreciation. Despite supply chain diversification since Japan's export restrictions in 2019, some advanced equipment and key materials still rely heavily on Japan, meaning prolonged yen strength could increase production costs.
Professor Kim noted, "If the unwinding of the yen carry trade leads to a weaker dollar, the won may strengthen, which could pose some challenges for exports. However, the semiconductor industry is primarily influenced by AI investment and the recovery of the semiconductor market, so the likelihood of significant export disruptions due to exchange rate changes is limited." He added, "Moreover, South Korean companies' direct investment in the U.S. and expansion of local production could also act as a factor for a weaker won. Therefore, even if the yen remains strong, the impact on exports may not be substantial if the won does not strengthen alongside it."
* This article has been translated by AI.
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