Korean Yen Loans Increase Amid Low Interest Rates and Yen Depreciation

As the won-yen exchange rate falls to around 840 won per 100 yen, the outstanding balance of yen loans at major banks is on the rise again. This increase is attributed to borrowing incentives from Japan's low interest rates and the funding needs of companies importing Japanese raw materials and equipment. However, experts warn that if the yen appreciates, the repayment burden in won could increase, necessitating careful consideration of both interest rates and exchange rate fluctuations.

According to the financial sector on October 27, the outstanding balance of yen loans at the five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) was recorded at 80.168 billion yen at the end of last month. This marks an increase of 10.77 billion yen (15.4%) from 69.461 billion yen at the end of last year.

The recent uptick contrasts with the decline in yen loans during the second half of 2024 and early 2025, when repayments were prompted by a stronger yen and rising Japanese interest rates. During that period, the outstanding balance of yen loans at the five major banks decreased from 77.8 billion yen at the end of August 2024 to 72.5 billion yen by the end of February 2025. The banks explained that the won-yen exchange rate, which was in the 850 won range per 100 yen at the end of June 2024, approached 1,000 won by March 2025, leading companies to repay their loans.

After a decline, the outstanding balance has increased again this year, recovering to early 2024 levels. At the end of January 2024, the balance was 80.5 billion yen. However, the increase in balance reflects both new loans and repayments of existing loans, making it difficult to interpret the entire increase as new borrowing demand.

Banking officials cite relatively low Japanese interest rates and the actual demand for yen among companies as the background for the borrowing trend. Jo Dong-geun, an emeritus professor of economics at Myongji University, noted, "Given that Japanese interest rates are lower than those in our country, there is an incentive to secure funds in yen," adding that expectations for the yen to remain at a low level likely influenced borrowing decisions.

However, the depreciation of the yen does not benefit all borrowers equally. Existing borrowers see their repayment burden in won decrease when the yen value falls, but new borrowers converting yen to won will receive less won for the same amount borrowed. Thus, the advantages and disadvantages of borrowing depend on the actual interest rate difference, the purpose of the funds, and future exchange rate movements.

Currently, yen loans are primarily being issued to companies that need funds for yen-denominated transactions. A financial sector source stated, "In the past, when yen interest rates were low, individual business owners and high-income earners borrowed yen loans, some of which were used for real estate investments. However, authorities have since managed foreign currency loans to align with actual demand, focusing on borrowers who can prove the purpose of their funds." The source added, "Currently, inquiries for yen loans are increasing among companies with actual demand for importing Japanese raw materials and equipment."

Even with actual demand for yen, the repayment burden due to rising exchange rates remains. If payments are made in yen but revenues are generated in won, an increase in the yen's value means more won will be needed to repay the debt.

In the past, borrowers of yen loans faced difficulties due to rapid exchange rate increases. In June 2007, the won-yen exchange rate fell to the 750 won range per 100 yen, but by March 2008, it surpassed 1,000 won. As repayment burdens grew during the financial crisis, a group of yen loan borrowers filed a class-action lawsuit against commercial banks.

Choi Byeong-moon, a lawyer representing the banks during that lawsuit, emphasized, "Foreign currency loans carry risks of fluctuating principal and interest repayment amounts due to exchange rate changes, so it is essential to calculate the won-denominated repayment amounts under various exchange rate scenarios in advance." He added that companies need to utilize appropriate hedging tools such as forward contracts, currency futures, and interest rate swaps to manage risks from fluctuations in exchange rates and interest rates.