Why Is the Yen Weak Despite Rate Hikes? ... Yen-Tech Enthusiasts Are Frustrated

Japan Lifts Negative Interest Rate but Yen Weakness Continues
Weakness Due to Expectations of Slow Rate Hike Pace
Yen May Strengthen Rapidly if US Lowers Interest Rates

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Jisoo Kim, a 30-something office worker, exchanged 5 million Korean won into Japanese yen after hearing news early this year that the yen's value had hit a record low. Kim said, "I invested in yen because I believe it will be difficult for the yen's value to fall further given that Japan has raised interest rates and the stock market has risen," adding, "If the yen drops further, I plan to buy more."

Although the Bank of Japan (BOJ) raised its benchmark interest rate for the first time in 17 years, the yen has shown a weakening trend. In Korea, the number of "Yentech" investors betting on yen appreciation has increased, but they are facing challenges managing returns due to the yen's weaker-than-expected performance.

According to the foreign exchange market on the 25th, the yen's value against the dollar was around 151 yen, marking the lowest level this year. The yen has depreciated about 7% against the dollar this year, recording the largest decline among major currencies.

On the 19th, the Bank of Japan raised its short-term policy rate by 0.1 percentage points from -0.1%, ending the negative interest rate policy introduced in February 2016. This led to expectations in the market that the yen would strengthen, and the number of people investing in yen also increased domestically.

According to the Bank of Korea, as of the end of last month, the balance of yen deposits held by residents in Korea surged to $9.86 billion, up 4.6% from the previous month and 60.8% from the same month last year. Yen deposit balances fluctuated around $6 billion until May last year but began to increase from July, surpassing $8 billion in August and now approaching $10 billion. This is the first time since the related statistics began in June 2012 that yen deposits have neared $10 billion.

The sharp increase in Korean yen deposits is analyzed to be due to financial investment funds flowing in with expectations of yen appreciation following the Bank of Japan's interest rate normalization. Jongchan Lee, head of the Capital Movement Team at the Bank of Korea's International Department, explained, "Despite the yen's continued weakness, yen deposits increased due to expectations of a shift to strength following the Bank of Japan's monetary policy normalization."

Interest has also grown in financial products that can profit from yen appreciation, not just yen deposits. Representative ETFs include KBSTAR U.S. Treasury 30-Year Yen Exposure (Synthetic H) and ACE U.S. 30-Year Treasury Yen Exposure Active (H), which purchase long-term U.S. bonds in yen. These products are designed to enjoy both foreign exchange gains from yen appreciation and bond price increases if the U.S. lowers its benchmark interest rate in the future. Trading volumes of these products surged after the Bank of Japan raised interest rates.

An employee is organizing US dollars and Japanese yen at the Hana Bank Counterfeit Response Center in Jung-gu, Seoul. Photo by Jinhyung Kang aymsdream@

Investors Betting on Yen Appreciation Increased, but Returns May Take Time

Although domestic investors' interest in yen appreciation has grown, the actual rise in the yen's value has been slow. Experts analyze that the Bank of Japan's removal of negative interest rates was already anticipated, and expectations for further hikes are low, so the impact on the yen has been minimal.

Researcher Yechang Choi from Sangsangin Securities said, "The Bank of Japan's rate hike was a normalization decision already expected, so its market impact was limited," adding, "Rather, announcements maintaining accommodative monetary conditions, such as continued government bond purchases, have led to a decline in Japanese government bond yields and depreciation of the yen."

Researcher Seongsu Kim from Hanwha Investment & Securities said, "The Bank of Japan will cautiously and carefully normalize monetary policy while monitoring the impact of wage increases on inflation," and judged, "It will be difficult for the number of additional hikes within the year to exceed one."

There is also a forecast that the yen will strengthen more when the U.S. lowers its benchmark interest rate rather than due to domestic conditions in Japan.

Researcher Jiyeon Woo from IBK Investment & Securities said, "With expectations of wage increases and a shift in financial policy, the yen will show gradual strength," but also forecasted, "As the Bank of Japan's follow-up policy measures are expected to proceed gradually, the impact will not be significant until the U.S. Federal Reserve's rate cut becomes clearly visible."

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