Foreign Funds of 4810 Trillion Yen Returning to Korea...? Concerns Over 'Ueda Wave Shock'

Bank of Japan Revises YCC Policy
Long-term Interest Rate Effectively Capped at 1%
Japanese Investors May Withdraw Funds

The Bank of Japan (BOJ), which has maintained a large-scale quantitative easing policy for 10 years, surprised markets by effectively raising the long-term interest rate ceiling to 1%, raising concerns that a significant portion of Japanese capital amounting to 531 trillion yen (approximately 4,810 trillion won) could flow out of the global financial market. There is a forecast that if Japanese investors liquidate the funds from the so-called 'yen carry trade,' where they borrow low-interest yen and convert it into dollars for overseas investment, a so-called 'Ueda-origin shock' could occur.

[Image source=Yonhap News]

BOJ signals tightening... "10-year bond yield to reach 1%"

On the 31st, the Nihon Keizai Shimbun analyzed that with the BOJ's policy change increasing the likelihood of the 10-year government bond yield reaching 1%, Japanese investors are more likely to repatriate funds back to their home country.

Bank of Japan (BOJ)

Earlier, on the 28th, the BOJ announced that it would maintain the long-term interest rate benchmark at 0.5% but raise the threshold for conducting open market operations from 0.5% to 1%. Since 2016, the BOJ has implemented a Yield Curve Control (YCC) policy by setting a target for the 10-year government bond yield, a long-term interest rate indicator, and purchasing government bonds without limit if the yield exceeds the target to prevent further increases. Previously, if the yield exceeded 0.5%, the BOJ would immediately buy government bonds to lower the rate, but now it plans to tolerate rising yields up to 1% depending on market conditions.

With the BOJ effectively raising the long-term interest rate ceiling to 1%, the market interpreted this as a prelude to rate hikes, causing the 10-year government bond yield to surge significantly. In July, the yield on Japan's 10-year government bonds, which had hovered around 0.4%, closed at 0.556% on the 28th, the day of the monetary policy meeting. On that day, the 10-year bond yield even spiked to 0.579% intraday. Moreover, with the BOJ raising the interest rate ceiling from 0.5%, there are forecasts that the 10-year government bond yield could reach the 1% range.

Will yen carry trade funds return to Japan?

As the long-term government bond yield trend rises, the possibility that Japanese investors will liquidate yen carry trade funds and repatriate investments has increased. With the likelihood of rising Japanese government bond yields (returns), the relative attractiveness of overseas assets is expected to decline.

[Image source=Asia Economy]

If fund repatriation begins, it is widely expected to cause a significant shock to the global financial market. According to the Japanese Ministry of Finance, at the end of last year, Japanese investors had invested 531 trillion yen in overseas stocks and securities. Compared to 10 years ago when Japan began its easing policy, Japanese investors' overseas investment amount has increased by 70%. Countries that have received large inflows of Japanese investor funds could suffer significant damage to their financial markets.

Central banks around the world and the International Monetary Fund (IMF) have continuously expressed concerns about the liquidation of yen carry trade funds following the BOJ's policy revision. The European Central Bank (ECB), in its May report on financial system stability, predicted, "If Japan shifts toward normalizing monetary policy, those who have invested by exploiting interest rate differentials may repatriate funds," and warned that "the rise in Japanese government bond yields will reduce the investment attractiveness of European bonds." The IMF, in its April Global Financial Stability Report, warned that "banks in Australia, the European Union (EU), and Malaysia could face capital outflow crises."

There are also forecasts that the BOJ's policy revision could ignite instability in the global financial market. The Nihon Keizai Shimbun stated, "Governor Kazuo Ueda denied that the YCC policy shift is a move toward tightening, but if long-term interest rates rise to their highest level in 10 years, the scenario feared by global financial authorities will become realistic."

This content was produced with the assistance of AI translation services.