The term 'safe asset' gains more significance as economic and financial markets become unstable. During times of war, financial crises, or recessions, investors tend to sell off riskier assets and flock to those perceived as stable. The U.S. dollar, gold, Swiss franc, and Japanese yen have long been considered representative safe assets. Particularly, the yen has served as a refuge in the global financial market, supported by Japan's substantial net foreign assets, ample liquidity, and political and social stability. However, the yen's recent performance starkly contrasts its past reputation.
The recent acknowledgment by the U.S. and Japanese governments of their coordinated intervention in the foreign exchange market to halt the yen's sharp decline is a significant event in itself. This marks the first joint market intervention by the two nations to defend the yen since the Asian financial crisis in 1998. The yen, which fell to a 40-year low of over 160 yen per dollar, has regained some stability following the intervention, but the fact that a currency from the world's fourth-largest economy requires support from its allies is a serious concern.
The yen's depreciation cannot be solely attributed to the interest rate differential between the U.S. and Japan. While the rate gap is a direct trigger, it is rooted in structural issues that have plagued the Japanese economy for decades. Long-term low growth, deflation, one of the highest national debts in the world, a declining and aging population, prolonged ultra-low interest rate policies, and doubts about the economic policies of the government led by Sanae Takaichi have collectively eroded trust in the yen, especially amid the AI revolution that has comparatively slowed industrial competitiveness. In the past, it was natural for the yen to appreciate during global economic crises, but now it is not unusual to see the yen weaken even as global uncertainties rise. The yen illustrates that the label of 'safe asset' can only be maintained when backed by a solid economic foundation.
In contrast, the recent movements of the Chinese yuan present an interesting juxtaposition. Last month, the yuan's exchange rate fell below 6.8 yuan per dollar, reaching its highest value in three and a half years. China also faces significant challenges, including a real estate slump, weak consumer spending, and strategic competition with the U.S. Nevertheless, its competitiveness across various sectors, including light industry, electric vehicles, batteries, semiconductors, shipbuilding, and aerospace, has bolstered exports and increased market trust in the yuan. While the unique aspects of China's foreign exchange market management and capital controls must be considered, it is undeniable that industrial competitiveness significantly impacts currency value.
The divergent trends of the yen and yuan offer insights for South Korea as well. Exchange rates are not determined solely by interest rate differentials or interventions by foreign exchange authorities. They reflect a comprehensive assessment of a country's growth potential, industrial competitiveness, fiscal health, and market expectations for the future. Increasing foreign exchange reserves and defending the exchange rate may provide temporary relief, but they do not create inherent trust in a currency. Markets evaluate currencies based on economic fundamentals. The recent appreciation of the won following SK Hynix's issuance of American Depositary Receipts (ADRs) illustrates that industrial competitiveness can influence currency value.
South Korea also faces structural challenges, including low birth rates, an aging population, and declining potential growth rates. At the same time, global competition surrounding next-generation industries such as AI, semiconductors, biotechnology, and future mobility is intensifying. The yen's decline is not solely Japan's issue; it serves as a warning that currency trust stems from economic trust. The status of safe assets and strong currencies can ultimately be sustained only on the foundation of robust industrial competitiveness and sustainable growth.
* This article has been translated by AI.
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