South Korean retail investors, hunting for bargains, have flocked to shovel in the Japanese currency hovering around its record low value in anticipation of an end to the Bank of Japan’s eight-year negative rate policy, but their investment return is warned to be lower than expected due to the BOJ's still-dovish stance.
According to Bank of Korea (BOK) data on Tuesday, residents' yen-denominated deposits at banks hit $9.86 billion at the end of February, up $460 million from the previous month and flirting with the historic high of $9.92 billion recorded in November last year.
Compared to the same month the year earlier, it marked a 60.8% increase in value.
As the country’s total resident foreign currency savings last month shrank $1.97 billion to $96.13 billion, yen-denominated deposits accounted for 10.3%, marking the first time for yen savings to exceed the 10% threshold as a portion of the country's total resident foreign currency savings.
Resident foreign currency deposits refer to foreign money deposited at banks by Korean individuals, Korean companies, foreigners residing in Korea for more than six months and foreign firms operating in Asia's fourth-largest economy.
The yen savings are mainly used by export and import companies for payments, and they generally stay at around $5 billion, making up about 5% of the country’s entire foreign currency deposits.
(Graphics by Sunny Park) But the depreciating value of the Japanese currency has revived individual investors’ appetite for it, leading to the rise in yen-denominated deposits, said the BOK.
According to BOK data, the yen weakened to 8.8580 won at the end of February from 9.0190 in January and 9.1270 in December when it staged a rebound from 8.7752 recorded a month earlier.
BOJ'S END OF NEGATIVE RATES
Market analysts also attributed the highly anticipated shift in the BOJ’s monetary policy stance to Korean investors’ strong demand for the yen.
The higher Japan’s interest rate, the higher the Japanese unit value, which could translate into profits if Korean investors exchange their yen holdings for Korean won.
But some market analysts warned of a cap on the rise in the yen's value even after the BOJ’s rate hikes, citing Japan’s fragile economic recovery on top of the US Federal Reserve’s rate changes.
The Bank of Japan (BoJ) headquarters complex in central Tokyo on March 19, 2024 (Courtesy of AFP via Yonhap) “While the Fed and the BOK will likely cut rates this year, the BOJ is expected to shift toward monetary tightening, boding well for a recovery of the yen's value against the won,” said Park Sang-hyun, an economist at Hi Investment & Securities Co.
“(But) the yen’s rebound is expected to be capped around the low 900 won level amid the solid recovery of Korea’s exports with (strong sales of) chips.”
The BOJ on Tuesday ended eight years of negative interest rates after increasing Japan’s rate for the first time in 17 years.
Still, the world’s No. 3 economy’s rate is kept around zero, and the country’s central bank hinted that it will go slow in any further rise in borrowing costs due to the country’s weak economic growth pace.
Compared with anticipated gains from stock or bond investments, the expected return on yen investment also looks less attractive, said market analysts.
The expected return on yen investment worth 400 million won ($300,0000) is estimated at 5% when the yen rises to 9.30 won from 8.85.
Write to Jin-gyu Kang at josep@hankyung.com Sookyung Seo edited this article.
