The Korean won has moved in the opposite direction from the Japanese yen, with the exchange rate falling below the 860-won level per 100 yen for the first time in two years and one month. The synchronization between the won and yen that had long characterized global financial markets is now breaking down, with decoupling becoming increasingly pronounced. In South Korea, strong semiconductor exports and the Bank of Korea’s preemptive rate hikes are driving won strength, while in Japan, expansionary fiscal policy and the U.S.-Japan interest rate differential continue to leave yen weakness unresolved.
On the 31st, the won-yen exchange rate based on Seoul Foreign Exchange Brokerage quotes stood at 859.3 won per 100 yen (approximately $0.6281). This is the lowest level since July 11, 2024, when it hit 857.5 won (approximately $0.6268), marking a two-year and one-month low. The won also strengthened against the dollar. On the same day, the won-dollar exchange rate in the Seoul foreign exchange market closed the weekly session at 1,368.6 won per dollar (approximately $1), down 3.9 won (approximately $0.0029). This is the lowest level since July 24, 2025, when it reached 1,367.2 won (approximately $0.9993), a one-year and one-month low.
Through the first half of this year, the won and yen weakened simultaneously amid dollar strength, but recent trends have diverged. The won has appreciated as foreign selling in South Korean equities subsided, dollars flowed into the country on the back of current account surpluses driven by strong semiconductor exports, and the Bank of Korea’s benchmark rate hikes added further support. The Bank of Korea raised its benchmark rate by 0.25 percentage points to 3% per annum on the 27th of last month, marking the second consecutive monthly hike. Bank of Korea Governor Shin Hyun-song said at the time, “Even though the exchange rate has stabilized considerably, we judge it is still elevated compared to the levels we have grown accustomed to in previous years,” adding that “there is room for further appreciation through early and preemptive monetary policy responses going forward.”
In contrast, the yen faces persistent weakness from the Takaichi government’s expansionary fiscal stance and the U.S.-Japan interest rate differential. A joint U.S.-Japan yen-buying intervention in late July had only limited effect. On the 31st, the yen-dollar rate in the Tokyo foreign exchange market breached 160 yen per dollar (approximately $1) intraday. This followed Federal Reserve Chair Kevin Warsh’s remarks at the Jackson Hole conference on the 28th, where he stated there is “work to do” if core inflation exceeds the 2% target, highlighting the possibility of additional U.S. rate hikes.
Japan spent a record $96.4 billion over the past month defending the yen. In late July, Japan conducted its first joint yen-buying intervention with the United States since 1998, but the yen has since given back more than half of the gains achieved at that time. The market views 161 yen per dollar (approximately $1) as the first line of defense, with the previous intervention zone of 162.9 to 163.3 yen (approximately $1) also cited as a key range.
Background of Yen Weakness and Japanese Market Reaction
Upward pressure on rates has also intensified in Japan’s bond market. Japan’s benchmark 10-year government bond yield rose to 2.95% intraday, the highest level since October 1996. This came as U.S. Treasury yields climbed following Chair Warsh’s remarks, combined with expectations that yen weakness could prompt the Bank of Japan (BOJ) to accelerate additional rate hikes.
Swap markets are pricing in roughly a 90% probability that the BOJ will raise rates at its monetary policy meeting on September 18. A full rate hike by the end of October is already priced in. If yen weakness heightens inflationary pressure through import prices, the BOJ’s case for tightening strengthens, and those expectations in turn push government bond yields higher. The interplay between foreign exchange and bond markets could amplify volatility.
Japan’s stock market fell sharply in early trading on U.S. rate concerns but recovered most of its losses by the afternoon. The Nikkei 225 closed at 66,311.93, down 93.63 points (0.14%) from the previous session. What stood out in the Japanese market that day was less the stock decline itself than the yen sliding back into the 160 range and long-term yields hitting a 30-year high.
Decoupling Expected to Persist, Volatility Risks Flagged
The decoupling between the won and yen is expected to continue for the time being. Seo Jeong-hoon, senior research fellow at Hana Bank, said, “Even if the U.S. and Japan conduct additional coordinated intervention, the effect will be limited and structural yen weakness factors will persist. In contrast, the won is continuing to strengthen on the Bank of Korea’s preemptive rate hikes and improving growth, so the won-yen exchange rate will likely fall further.”
However, some analysts note that a BOJ rate hike could be a wild card. Min Kyung-won, economist at Woori Bank, said, “If the Bank of Japan raises its benchmark rate in September, earlier than expected, and even hints at the possibility of additional hikes, hedge funds that have been betting on yen weakness could abruptly reverse course and start buying yen.” In July 2024, when the BOJ raised rates, the yen carry trade—borrowing low-interest yen to invest in overseas assets—contracted sharply, triggering a rush of yen buying and amplifying global equity market volatility as yen funding was repatriated.
Meanwhile, some investors who believe the yen has fallen sufficiently are buying yen in anticipation of a future rebound. As of the 25th of last month, yen deposit balances at South Korea’s five major banks—KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup—totaled ¥1.3456 trillion (approximately $8.4 billion). This surpasses the previous record of ¥1.2705 trillion (approximately $8.0 billion) set in June 2024 during the “super yen weakness” period. At that time, the won-yen exchange rate fell to the 850–880 won range (approximately $0.6213–$0.6432), attracting a wave of buying, but as the yen subsequently appreciated, profit-taking funds flowed out. Conversely, in April of last year, when the exchange rate exceeded 1,000 won per 100 yen (approximately $0.7309), yen deposits at the five major banks shrank to the ¥800 billion range (approximately $5.0 billion).