In the previous posts, we explored how the United States is pressuring South Korea to strengthen the won and why Japan could be next in line. But what happens if both countries begin revaluing their currencies?
While the mechanics of currency policy may feel distant to many investors, the market consequences are anything but abstract. In this final post of our series, we explore how a stronger yen or won could send ripples through global equity markets, bond yields, and capital flows—with effects that could be felt from Tokyo to Wall Street.
1. Safe Haven Status and the Return of the Yen
Historically, the Japanese yen has been a safe-haven currency, rising during global risk-off events. However, this status has weakened in recent years due to:
- Japan’s near-zero interest rates
- The BoJ’s extreme monetary easing
- A structural shift in FX carry trades favoring higher-yielding currencies
If the yen strengthens substantially—either via policy normalization or external pressure—its safe-haven status could be reasserted.
Market Impact:
- In times of global risk aversion, capital could flow back into yen, pushing it even higher.
- Currency-hedged equity flows may reverse, especially from global ETFs that invest in Japan.
- Volatility in USD/JPY could increase, challenging FX carry trades and pushing global investors to reduce leverage.
2. Equity Market Realignment: Exporters vs Importers
Both Japan and South Korea are major export economies. A stronger currency typically:
- Hurts exporters: Their products become more expensive in global markets.
- Benefits importers: Raw materials and energy become cheaper in domestic currency terms.
Likely Equity Impacts:
Japan:
- Negative for Nikkei 225: Heavyweights like Toyota, Sony, and Mitsubishi rely on a weaker yen for profitability.
- Positive for domestic plays**: Retail, utilities, and real estate firms with high import exposure could outperform.
South Korea:
- Headwinds for Samsung, Hyundai, and SK Hynix
- Tailwinds for consumer-focused sectors benefiting from improved purchasing power
Global Contagion:
- Emerging Markets (EMs): A stronger yen/won may tighten financial conditions in Asia, triggering outflows from EM equities.
- US Equities: If dollar strength fades due to Asian currency appreciation, it may support US multinationals with overseas earnings.
3. Bond Market Implications: Capital Reallocation & Yield Pressure
Currency strength in Japan and Korea also affects their sovereign bond markets—and by extension, global fixed income flows.
Japan:
- Japanese investors hold massive positions in US Treasuries, European bonds, and emerging market debt.
- A stronger yen makes foreign bonds less attractive in yen terms.
- If BoJ policy tightens and yen appreciates, Japanese investors may repatriate funds, pushing up yields abroad.
South Korea:
- Korean pension funds and banks are significant global investors.
- A stronger won reduces the hedging cost of owning foreign assets, which could increase global bond demand.
- But if stronger currency slows exports and growth, local bond demand may rise, driving yields down domestically.
4. Risk Sentiment and Volatility Dynamics
Currency realignments don’t happen in a vacuum—they can shake market psychology and asset allocation decisions.
Volatility Channels:
- FX volatility rises → investors hedge more → VIX and equity vol increase
- Bond volatility rises → tighter financial conditions → pressure on risk assets
Risk Sentiment Effects:
- A stronger yen/won could be interpreted as policy tightening, which reduces global liquidity and amplifies risk-off mood.
- On the flip side, reduced inflationary pressure from stronger currencies might boost investor confidence in disinflation and soft-landing narratives.
5. Cross-Border Capital Flows: Reversal or Realignment?
Global markets are interwoven by capital flows, and FX strength can shift where money goes.
Potential Shifts:
- Out of Japanese/Asian export ETFs → into US industrials or services
- From US tech into Asia domestic themes (consumer, healthcare) if FX trends persist
- More flows into Asian fixed income if FX stability returns and yields are attractive
Conclusion: Watch the Currency, Feel the Markets
Currency shifts—especially in globally systemic economies like Japan and South Korea—have cascading effects. A stronger yen or won isn’t just a local story; it’s a signal of monetary and geopolitical realignment.
Investors, asset managers, and policymakers should prepare for:
- Repricing in export-heavy equity indices
- Yield shifts in global bond markets
- Capital reallocations across regions
- New FX-driven volatility regimes
In a world where geopolitics, inflation, and liquidity are all in flux, exchange rates are no longer just economic barometers—they are instruments of strategic influence.
IBAFIN 
Leave a comment