After the announcement of reciprocal tariffs in the United States, the dollar has weakened, leading global investors to flock to the yen. As the position of the dollar as a safe asset is shaken, the yen, as an alternative investment asset, has risen. Recently, with the possibility of a rate hike by the Bank of Japan (BOJ) being added, concerns over the liquidation of yen carry trades, which had been quiet for a while, are resurfacing.
◇ Dollar-yen drops to 142 yen, the lowest since last September
According to Investing.com, the dollar-yen exchange rate recorded 142 yen on the 18th, marking the lowest level since last September. This is lower than the early August figure of 146 yen, when the Bank of Japan unexpectedly raised interest rates, leading to a sharp decline in global risk appetite.
This is the impact of President Donald Trump's erratic tariff policy causing the dollar to weaken. On the 9th, President Trump imposed reciprocal tariffs of at least 10% and up to 34% on trade partners but suspended these tariffs for 90 days for 57 countries excluding China the very next day. Since then, he has sharply reversed his policy by also suspending tariffs on some auto parts.
The dollar index, which shows the value of the dollar against the currencies of six major countries, recorded 99.40 as of 3:02 p.m. on this day, maintaining the 99 mark for six trading days since the 11th. It is the first time in over three years that the dollar index has dropped below 100 since April 2022.
Global investors are turning to the yen, a safe asset that can replace the dollar. According to the Commodity Futures Trading Commission (CFTC), the speculative net position in yen recorded a net purchase of 121,800 contracts as of the 12th, reaching a record high. This indicates that the number of investors selling dollar and other currency assets and buying yen has increased.
The policy changes of the Bank of Japan are also attracting global investment funds. Kazuo Ueda, the BOJ governor, recently noted, "The current real interest rate is very low," suggesting the possibility of a rate hike. The market anticipates that the Bank of Japan will implement additional rate hikes in June or July. Rate increases act as a factor for currency value appreciation and further stimulate the yen's strength.
◇ "Yen buying momentum persists since the beginning of the year... The possibility of a repeat of Black Monday is low"
However, experts generally agree that the potential for immediate market shocks is limited. The possibility of a repeat of the unexpected sharp drop that occurred in August last year, known as the "yen carry trade driven Black Monday," is considered low. At that time, investors who did not expect the yen's strength rushed to buy yen, causing global financial markets to fluctuate, but this time the market has actively been buying yen.
Chanhee Kim, a researcher at Shinhan Investment Corp, stated, "In July and August last year, the yen strengthened sharply due to Japan's unexpected rate hikes and concerns over the U.S. economic recession. Now, we are in a situation where the yen's strength, which began at the start of the year, continues." He added, "While Japanese funds investing in high-interest currencies such as the dollar have been liquidated more than before, the speed is not fast enough to significantly impact the market."
Sooyeon Park from MERITZ Securities noted, "While yen futures net purchases have increased a lot as the yen strengthens, it is difficult to see the overall size of the yen carry trade as having significantly decreased." He explained, "If carry trades had been liquidated, there should have been large-scale capital outflows in the market, but such fluctuations have not been observed."
However, there are voices suggesting that one cannot be reassured in the medium to long term. Once Japan's rate hike trend solidifies, the amount of yen loans from global banks may decrease, and the likelihood of Japanese investors' overseas securities investments returning to Japan increases. If global investment funds flow back to Japan, concerns over capital flight from emerging markets cannot be ruled out.
According to a report titled "Estimating Changes in Yen Carry Trade Yields and Liquidation Possibilities" released by the International Department of the Bank of Korea last August, the total balance of yen carry trade funds was estimated at 506.6 trillion yen (approximately $34 billion or 4,708 trillion won) as of the end of March last year. The Bank of Korea analyzed that 32.7 trillion yen (approximately 304 trillion won), or 6.5%, of this amount is likely to be liquidated. If this amount is liquidated on a large scale, volatility in the currencies or stock markets of emerging countries could increase.
An official from the Bank of Korea stated, "Currently, the market's view is that there is a low possibility of the yen carry trade being rapidly liquidated." However, he noted, "The yen carry trade will move according to Japan's monetary policy and the investment yields of overseas assets," and added, "We will closely monitor any changes that may occur in the future."