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Lee Bok-hyun: "Japan's Rate Hike Unlikely to Trigger Yen Carry Trade Unwinding... Monitoring Closely"

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Korea Economic Daily
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  • Governor Lee Bok-hyun stated that despite the Bank of Japan's rate hike, the likelihood of yen carry trade unwinding is low.
  • Due to the current interest rate gap and the weak yen, the incentive for yen carry unwinding is lower than last year.
  • However, he emphasized the need to closely monitor changes in external conditions to prepare for global market volatility.
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Lee Bok-hyun, the Governor of the Financial Supervisory Service, stated on the 24th that while the Bank of Japan (BOJ) raised its policy interest rate from 0.25% to 0.5%, the likelihood of a rapid unwinding of yen carry trades is low. However, he urged close monitoring of changes in external conditions.

During a financial situation review meeting, Governor Lee remarked, "Compared to July last year, although the BOJ's rate hike is the same, last year the narrowing of the US-Japan interest rate gap strengthened the yen, whereas currently, the interest rate gap is large and the yen is weak, reducing the incentive for yen carry unwinding."

This statement comes in response to concerns from some market participants about the potential recurrence of market shocks due to rapid yen carry unwinding, similar to what occurred last year following the BOJ's third rate hike since ending its negative interest rate policy in March last year.

Yen carry trade unwinding refers to the scenario where investors, who borrowed cheap yen to invest in other countries, seek to retrieve their assets when the yen's value rises, leading to a drop in asset prices. When Japan raises its base rate, the profitability of such investments diminishes, increasing the likelihood of these funds being unwound.

Governor Lee added, "However, as market shocks occurred last year following the BOJ's rate hike due to the deterioration of US employment indicators highlighting recession concerns, it is necessary to closely monitor changes in external conditions."

He also urged, "During the Lunar New Year holidays, as the US Federal Reserve (Fed) and the European Central Bank (ECB) make rate decisions and US inflation indicators are announced, global market volatility may increase, so please be prepared to respond at any time."

Reporter Noh Jeong-dong, Hankyung.com dong2@hankyung.com

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