The 17-year trend of Japan’s persistent negative interest rates has come to an end, yet the market’s response remains tepid. This is attributed to assessments indicating difficulty in perceiving a full-fledged tightening. However, there are prospects suggesting that the yen may strengthen from the second half of the year in tandem with interest rate cuts in the United States. The South Korean stock market, which has been adversely affected by the weak yen, have found opportunities for benefits aligned with the “Value-Up” policy.
According to investment banking industry sources on March 21, the Bank of Japan (BOJ) held a financial policy meeting on March 19 and decided to raise the short-term policy interest rate from the existing -0.1 percent to a range of 0 to 0.1 percent. This marks the first interest rate hike in 17 years since February 2007, and it also marks the end of the negative interest rate policy introduced in February 2016.
However, the BOJ also stated that it would maintain an accommodative financial environment. Specifically, it mentioned continuing some purchases of government bonds even after the abolition of the yield curve control (YCC) policy and it expressed readiness to increase purchases if interest rates were to rise sharply.
Despite the discontinuation of negative interest rates, the yen continued to weaken. On March 19 (local time), the yen fell to 150.96 against the U.S. dollar in the New York foreign exchange market, marking its weakest level since November last year. This was largely due to the fact that the market already anticipated the BOJ’s decision. Moreover, analysts perceive the BOJ’s stance as closer to “normalization” rather than a shift towards tightening.
Nevertheless, experts forecast a long-term upward trend in the yen’s price. This is because of the possibility of a gradual reduction in the interest rate differential between the United States and Japan.
If the yen were to reverse its current depreciation and strengthen, this could present an opportunity for growth in the South Korean stock market. So far, the weak yen has acted as a factor attracting foreign investors to the Japanese stock market, in line with Japan’s value-up policy. This is because it offers the opportunity for arbitrage gains due to exchange rate differentials.
Park Sang-hyun, a researcher at Hi Investment & Securities, stated, “The super weak yen phenomenon is not favorable from the perspective of the domestic economy and stock market. Since the super weak yen supports the investment attractiveness of the Japanese stock market, it can have a negative impact on the domestic stock market.”
Therefore, the strengthening of the yen after the second quarter could play a positive role in attracting foreign investors to the South Korean stock market. Especially from the third quarter onward, the full implementation of South Korea’s Value-Up policy by financial authorities could further stimulate stock market activity.
Financial authorities, in collaboration with the Korea Exchange, are currently developing the South Korea Value-Up Index. This index aims to target companies that excel in enhancing their corporate value and efforts. Development is expected to be completed in the third quarter of this year, followed by the listing of exchange-traded funds that track the index in the fourth quarter.