The Japanese yen (JPY) and South Korean won (KRW) have fallen sharply against the US dollar (USD) over the past three months, sparking warnings from Tokyo and Seoul. The Bank of Japan (BOJ) may postpone interest rate hikes to curb imported inflation, while the Bank of Korea (BOK) points to the weak won as an impediment to monetary easing. USD/JPY moves are likely to impact USD/KRW as intervention risks rise, noted Philip Wee, chief FX strategist at DBS.
The Bank of Japan signals the possibility of an early rate hike amid yen weakness
“We are increasingly concerned about rising intervention risks in the Japanese yen and South Korean won. The value of each currency has fallen by more than 5% against the US dollar over the past three months, briefly erasing this year’s gains last week. Finance ministers in Tokyo and Seoul have publicly pointed to unilateral and speculative moves in their exchange rates.”
“Regarding the excessive weakness of the currency fueling imported inflation, the Bank of Japan confirmed that it may advance its schedule for raising interest rates without waiting until the end of wage negotiations in the spring of next year. The Bank of Korea blamed the weakness of the South Korean won for limiting its ability to cut interest rates to support the domestic economy.”
“Unlike Seoul, Tokyo has been upfront about its intervention threshold, intervening before USD/JPY reached 160. When Japan intervened in July 2024, USD/JPY had fallen sharply from a 38-year high of 162. Given its high correlation to the Japanese yen based on this year’s index, we expect USD/JPY to drag USD/KRW lower when it declines.”
