Although the Japanese government is putting various economic pressures on South Korea, Japanese funds invested in the South Korean bond market are at a similar level to usual. In particular, more Japanese funds flowed into the market in July after Tokyo decided to impose curbs on exports of high-tech materials to Seoul on July 1.
Japanese capital net inflows into the South Korean bond market came to nearly 40 billion won (US$32.91 million) in July, according to financial authorities on Aug. 7. Japanese funds tended to be decoupled from Japanese Prime Minister Shinzo Abe's administration despite an escalating trade conflict between South Korea and Japan.
In the Korean bond market, government bonds, including monetary stabilization bonds issued by the Bank of Korea (BOK), account for 47 percent of the total. However, there are still no signs of Japanese investors' movements to sell government bonds or monetary stabilization bonds despite the escalating bilateral trade row. They have rather become net buyers.
Under the current circumstances, Japanese investors seem to think that South Korea’s financial market soundness is stable. Kim Sang-hoon, head of bond credit at KB Investment & Securities Co., said, “Investors usually purchase government bonds after taking into account a country’s financial soundness, such as foreign exchange reserves, current balance, fiscal balance and credit rating. I don’t think Japanese investors believe that Korea is in a very serious situation.”
Not only Japanese investors but also other foreign investors are showing a stronger preference for South Korean bonds. The foreign ownership of listed bonds hit a record high at the end of June for two months in a row. The total amount of listed bonds owned by foreigners stood at 119.20 trillion won (US$98.07 billion) in May and 124.50 trillion won (US$102.43 billion) in June. Foreigners bought 214.40 billion won (US$176.39 million) worth of won-denominated bonds even when the Japanese government excluded South Korea from its trade whitelist on Aug. 2.
Meanwhile, some point out that Japanese funds can leave South Korea if the trade dispute between South Korea and Japan is prolonged. However, it will only have a marginal effect as Japanese capital has a small portion of the South Korean bond market. Japanese investors hold approximately 1.70 trillion won (US$1.40 billion) worth of South Korea's listed bonds, accounting for a mere 1.4 percent of the country's bond market.