The global financial market is on edge as it awaits decisions on interest rate hikes from the U.S. Federal Reserve and the Bank of Japan (BOJ) scheduled for September 16 and 18, respectively. With expectations high that both central banks will raise rates, attention is turning to the potential impact on domestic capital markets. Over the past year, approximately 10 trillion won has flowed into the Korean market from yen carry trade funds. Concerns are growing that a rate increase by the BOJ, coupled with yen appreciation, could trigger a significant money move of Japanese investment assets.
According to the financial investment industry, the Federal Reserve is expected to announce its decision on interest rates on September 16, while the BOJ will follow on September 18. Market speculation suggests that both central banks are likely to raise rates by 25 basis points (1 basis point = 0.01 percentage points). Notably, there are projections that the BOJ may sharply increase its benchmark rate to 1.75% by the second quarter of next year.
As the possibility of simultaneous rate hikes in the U.S. and Japan looms, market participants are closely monitoring the direction of the yen's value. The outcome of these rate hikes could significantly influence global capital markets, particularly whether the yen will continue to strengthen or reverse course. Since July, the yen has shown a strengthening trend, and if this continues, the liquidation of the 'yen carry trade,' which amounts to nearly $1 trillion, could become a reality.
Leading indicators signaling a potential liquidation of the yen carry trade are emerging in the global capital markets. According to the Commodity Futures Trading Commission (CFTC) report on investor positions as of September 8, speculative net positions in yen futures were recorded at plus 10,796 contracts. This marks a shift of 103,023 contracts toward net buying from a negative position of minus 92,227 contracts just a week earlier. Analysts suggest that speculators who had previously bet on a weaker yen are now adjusting their positions in anticipation of a stronger yen.
In the domestic capital market, there is a growing sense of tension. Concerns are rising that a surprise rate hike by the BOJ, similar to the one in August 2024, could trigger a liquidation of the yen carry trade. According to YuJin Investment & Securities, as of July, the foreign currency-denominated assets of Japanese investment trusts amounted to 133.3091 trillion yen (approximately 1,167.18 trillion won), a 75% increase from 76.7558 trillion yen in August 2024. During the same period, the scale of Japanese investment assets flowing into Korea surged from 287.2 billion yen (approximately 250 billion won) to 1.1106 trillion yen (approximately 967 billion won), marking a 287% increase.
A securities industry official noted, 'While the risk of yen carry trade liquidation is largely seen as already priced into the market, we cannot rule out the possibility of a rapid withdrawal of Japanese liquidity that had flowed into Korea, especially during the recent KOSPI boom.'
* This article has been translated by AI.
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