If Yen Carry Liquidates, Exchange Rate Goes to 1200 Won

Japan utilized its holdings of $1.1 trillion in U.S. Treasury bonds to lower the value of the dollar. The Japanese government sells U.S. Treasury bonds to secure dollar cash. It then intervenes in the market by selling these secured dollars in the foreign exchange market, increasing the supply of dollars, and thereby lowering the dollar's value.

This occurred as China reduced its holdings of U.S. Treasury bonds and scaled back new purchases. The U.S. secured dollars by selling Eurobonds and provided them to Japan, and this simultaneous intervention by the U.S. and Japan became a decisive trigger for the sharp fall in exchange rates and the decline in the Korean won exchange rate.

This method involves the government directly purchasing 30-year maturity bonds in the bond market and issuing 1-2 year maturity short-term government bonds to finance these purchases. This creates a risk structure similar to companies rolling over commercial papers to raise funds in the past, causing anxiety in the market.

The Bank of Korea is focused on curbing real estate market overheating, especially the explosive rise in apartment prices below 1.5 billion won. Stabilizing household debt and the real estate market is analyzed as a key policy goal for the Bank of Korea. Monetary Policy Board members' forecast for the policy rate within six months is at 3.25-3.5%, contrasting with the situation where the U.S. faces political pressure making interest rate hikes difficult.

Numerous Japanese companies, including SoftBank, borrowed large amounts of yen at Japan's ultra-low interest rates to invest in overseas companies such as U.S. startups or ARM in the UK. They converted yen to dollars for overseas investments. If the yen carry trade is unwound, a large-scale dollar sell-off could occur to repatriate investment funds and due to yen appreciation, increasing downward pressure on the exchange rate.

This, coupled with declining confidence in the U.S. dollar, further increases the risk of yen carry trade liquidation. If the yen carry trade is unwound, the Korean won exchange rate is likely to plummet to the 1,200 won level along with the yen's appreciation.

The exchange rates of Korea, Japan, and Taiwan tend to synchronize due to various real-world factors. These three countries commonly face pressure to fulfill large-scale investment promises (300-400 billion dollars) made during the Trump administration and tariff risks. Furthermore, due to the communal characteristics of semiconductor industry trends, global investors tend to perceive these three countries similarly and formulate investment strategies accordingly.

It was argued that exchange rate hedging strategies are useless because market forecasting is an impossible area even for experts. The perception is that it is difficult to predict the direction of exchange rates due to a large discrepancy between long-term fundamentals and short-term volatility. Therefore, it was suggested that it is preferable to maintain the natural ratio of foreign currency assets an individual holds, rather than relying on currency hedging.

A historic shift is occurring in the composition of foreign exchange reserves held by central banks worldwide. The proportion of U.S. Treasury bonds, which was once the top priority, is declining, and the proportion of gold holdings is now surpassing it. The U.S. Federal Reserve (FED) has even published a separate report on this shocking change, indicating its awareness of market shifts.

The freezing of $300 billion in Russia's foreign exchange reserves instilled in various countries the perception that the U.S. dollar and financial transactions with the U.S. could be risky. Subsequently, sales of U.S. Treasury bonds and purchases of gold have accelerated, especially among countries unfriendly to the U.S.

Pro-U.S. countries such as Switzerland, Japan, and Korea maintain their holdings of U.S. Treasury bonds, while countries unfriendly to the U.S., such as China, Russia, Saudi Arabia, and India, are selling U.S. Treasury bonds and increasing their gold holdings. The BRICS countries' preference for gold is an ongoing phenomenon, signaling a tectonic shift in the international financial market.

The Bank of Korea shows hesitation regarding gold purchases. After purchasing gold in the early 2010s, the Bank of Korea incurred a 30% loss, and the experience of being reprimanded for this during a parliamentary audit remains a trauma within the organization. Due to this experience, the Bank of Korea currently maintains a low gold-to-foreign exchange reserve ratio of around 1%. This contrasts sharply with the global central banks' preference for gold.

Poor management and terrible timing of leveraged ETFs negatively impacted the market. Large-scale loans and liquidations by overseas hedge funds also contribute to volatility. 150 trillion won of individual funds bought at peak prices and the lack of rebalancing by the National Pension Service further exacerbate the situation where there is no entity to act as a market safety net, making it difficult to predict when volatility will subside.

Currently, U.S. Treasury bonds offer an annual interest yield of 5%, and if crises like 2008 or 2020 occur again, additional profits can be expected from surging exchange rates. However, it remains a difficult market environment for short-term investors, and it must be acknowledged that there are not many assets beyond deposits that can beat inflation.