🚨 Japan's 30-year Bond Yield Surpasses Korea...Yen Strengthening Outlook
Today Korean Economic News | 2025.03.23
📌 Japan's 30-year Bond Yield Surpasses Korea...Yen Strengthening Outlook
💬 Recently, Japan's 30-year government bond yield has surpassed that of Korea. The Bank of Japan (BOJ) continues to raise interest rates in response to price increases and economic recovery. In contrast, Korea's long-term bond yields are showing a downward trend due to concerns about economic slowdown. These changes have also raised expectations for a stronger yen.
1️⃣ Easy Understanding
A reversal phenomenon has occurred where Japan's long-term government bond yields are now higher than Korea's. This is not just a simple numerical change but has significant implications for the economic situations and future currency values of both countries. Let me explain this phenomenon simply.
A government bond yield is the interest rate the government pays when borrowing money. A 30-year maturity bond represents the government borrowing money for 30 years, reflecting the long-term direction of the economy. Generally, long-term interest rates rise when economic growth and inflation are expected.
For a long time, Japan maintained a "zero interest rate" or even "negative interest rate" policy. This was because the Japanese economy suffered from deflation (price decline) and low growth for nearly 30 years. In contrast, Korea maintained relatively higher interest rates due to its higher growth rate and inflation. Therefore, it was considered natural for Japan's government bond yields to be lower than Korea's.
However, the situation has been changing recently. Japan is finally escaping deflation with steadily rising prices and showing signs of economic recovery. In response, the Bank of Japan ended its zero interest rate policy after 17 years and began raising rates. Meanwhile, Korea's economic growth outlook is becoming uncertain due to export difficulties and weak domestic demand, raising expectations that the Bank of Korea will lower interest rates.
This change has led to a reversal where Japan's 30-year government bond yield has surpassed Korea's equivalent maturity yield. This is an unexpected situation, like a runner who has always been behind suddenly taking the lead in a long-distance race.
Interest rates and currency values have a close relationship. Generally, when a country's interest rates rise, its currency tends to strengthen. This is because foreign investors purchase assets in that country's currency to receive higher interest rates. Therefore, Japan's interest rate hike is likely to lead to a stronger yen.
These changes are not just a numbers game in the financial market. If the yen strengthens, traveling to Japan becomes more expensive, and the import prices of Japanese products increase. Also, Korean companies exporting to Japan may see their price competitiveness weaken. Conversely, tourists coming from Japan to Korea may increase, and products made in Korea may become more competitive in the Japanese market. This shows how small changes in interest rates can have various effects on the real economy and our daily lives.
2️⃣ Economic Terms
📕 Government Bond Yield
Government bond yields reflect the return on bonds issued by governments, indicating the national economic situation and monetary policy direction.
- They are classified as short-term, medium-term, and long-term rates according to maturity, with 30-year bonds being ultra-long-term.
- They are influenced by various factors including investors' future economic outlook, inflation expectations, and central bank policies.
📕 Central Bank
Central banks are institutions that manage inflation and economic conditions through key interest rate adjustments, serving as the core actors of monetary policy.
- The Bank of Japan (BOJ) and Bank of Korea are the central banks of Japan and Korea respectively, with price stability and financial stability as their main objectives.
- They also communicate with financial markets and manage expectations about future policy directions (forward guidance).
📕 Currency Strengthening/Weakening
Currency strengthening refers to when a country's currency value rises against other currencies, with interest rate increases being a factor in currency strengthening.
- It has economic impacts such as weakening export competitiveness, lowering import prices, and reducing overseas travel costs.
- In addition to interest rates, various factors such as current account balance, economic growth rate, and political stability affect currency values.
📕 Gap Between Long-term and Short-term Interest Rates
The gap between long-term and short-term interest rates is the difference between long-term and short-term government bond yields, serving as an important indicator for economic outlook.
- In a normal economy, a "normal yield curve" forms where long-term interest rates are higher than short-term rates.
- When the gap between long-term and short-term rates narrows or inverts, it is often interpreted as a signal of economic recession.
3️⃣ Principles and Economic Outlook
💡 Background and Significance of the Interest Rate Reversal Between Japan and Korea
The reversal of 30-year government bond yields between Japan and Korea reflects the different economic situations and monetary policy directions of both countries.
First, Japan's rising interest rates can be seen as a signal of escaping long-term deflation and economic normalization. Japan has suffered from deflation and low growth for about 30 years since the bubble burst in the early 1990s. During these "lost 30 years," the Bank of Japan (BOJ) implemented various non-traditional monetary policies such as zero interest rate policy, quantitative easing, and yield curve control (YCC). However, recently, as Japan's consumer price index (CPI) has risen above 2% due to wage increases, domestic demand recovery, and the impact of global inflation, the Bank of Japan ended its zero interest rate policy in early 2024 after 17 years. It has continued to implement additional rate hikes, normalizing its monetary policy. This reflects expectations that the Japanese economy may finally be escaping the deflation trap and entering a normal growth and price trajectory. In particular, the rise in 30-year government bond yields suggests that the long-term economic outlook is improving.
Second, Korea's decline in long-term interest rates reflects concerns about economic slowdown and expectations for monetary policy easing. Korea has actively raised interest rates since 2022 to control inflation, increasing the base rate to 3.5%. However, recently, concerns about economic slowdown have been growing due to export difficulties, real estate market stagnation, and household debt burden. In fact, Korea's economic growth forecast is being continuously revised downward, and the inflation rate is also stabilizing. Accordingly, expectations are rising that the Bank of Korea will cut rates in the first half of 2025, which is being reflected in the decline of long-term government bond yields. In particular, 30-year government bond yields tend to react more sensitively to future economic outlook and expected inflation than short-term rates, reflecting greater concerns about long-term economic slowdown.
Third, the interest rate reversal between the two countries shows the decoupling of economic cycles. Traditionally, Korea and Japan tended to move together with the global economic cycle, but significant divergence has been appearing recently. Japan is entering a phase of economic revitalization after escaping long-term deflation, while Korea is entering a phase of economic slowdown after rapid interest rate hikes. This decoupling of economic cycles stems from various factors including the industrial structure, demographic structure, and policy responses of each country. In particular, Japan is seeing the effects of structural reforms, wage increases, and increasing tourists that have continued since Abenomics, while Korea is more significantly affected by the slowdown in global trade due to its high dependence on exports.
Fourth, the interest rate reversal could also bring changes to capital flows and investment patterns between the two countries. If Japan's interest rates become higher than Korea's, capital seeking returns could move from Korea to Japan. In particular, as the traditional perception of Japan as a "low interest rate country" changes, global investors' interest in the Japanese market could increase. In fact, the Japanese stock market has been performing well recently, and foreign investment in Japanese government bonds is also increasing. On the other hand, Korea may face a higher possibility of foreign capital outflow, which could expand financial market volatility. These changes in capital flows could have a wide-ranging impact on exchange rates, stock markets, and real estate markets in both countries.
In summary, the reversal of 30-year government bond yields between Japan and Korea can be seen as an important signal reflecting not only a change in financial indicators but also structural changes in both economies and a change in market perception of future outlook. This suggests a change in the paradigm of "low-growth Japan, high-growth Korea" that has persisted for the past few decades.
💡 Yen Strengthening Outlook and Its Impact
Expectations for a stronger yen are rising along with Japan's interest rate hikes, which is expected to bring various economic ripple effects.
First, interest rate increases can be a powerful catalyst for yen strengthening. Generally, when a country's interest rates rise, the value of its currency tends to rise as well. This is because the inflow of international capital seeking higher interest rates increases the demand for that currency. In particular, Japan has long been perceived as a "low interest rate country," and the yen has been used as a "funding currency." Investors actively engaged in the "yen carry trade," borrowing funds in the low-interest yen and investing in high-interest currencies. However, as Japan raises interest rates, this carry trade is being reduced, decreasing the selling pressure on the yen and potentially increasing the buying demand. In fact, the yen's value has been trending upward following the Bank of Japan's interest rate hike decision, and this trend is expected to strengthen further if Japan's monetary policy normalization continues.
Second, a stronger yen could have opposite effects on the economies of Japan and Korea. From Japan's perspective, a stronger yen could lead to weakened export competitiveness. In particular, major export industries such as automobiles and electronic products could be affected. On the other hand, there are also positive effects such as decreased import costs and expanded opportunities for overseas asset acquisition. From Korea's perspective, a relatively weaker won could lead to strengthened export competitiveness, but industries competing with Japan (semiconductors, automobiles, shipbuilding, etc.) could face intensified price competition. There is also a possibility that the cost of importing parts, materials, and equipment from Japan could increase, raising manufacturing cost pressures.
Third, changes in tourism and consumption patterns are also expected. A stronger yen would increase the cost of traveling to Japan, potentially reducing Korean tourism to Japan. On the other hand, Japanese visits to Korea could increase. In fact, exchange rate fluctuations are known to have a significant impact on tourism flows. In terms of consumer goods prices, changes such as rising prices of Japanese imports and strengthened price competitiveness of Korean exports are expected. This could affect the competitive landscape in consumer goods markets such as cosmetics, fashion, and food.
Fourth, significant changes are also expected in financial markets and investment flows. Yen strengthening and Japanese interest rate increases could trigger a "repatriation of funds to Japan." Japan is the world's largest creditor nation, holding enormous assets overseas. If the domestic investment environment improves, funds that have been invested overseas could potentially return to Japan, which could have a significant impact on global capital flows. For the Korean financial market, foreign investors may adjust their asset allocation considering the relative yield and currency value changes. The attractiveness of investing in Japanese assets could increase, while for Korean assets, opportunities could arise in terms of valuation.
In summary, Japan's interest rate hikes and expectations for a stronger yen are expected to have a wide-ranging impact on the economies and financial markets of both countries. While these changes could be challenging factors in the short term, they could also serve as an opportunity for balanced development and strengthened competitiveness of both economies in the long term. In particular, companies need to strengthen their exchange rate risk management strategies and respond to external environmental changes by enhancing non-price competitiveness.
💡 Future Monetary Policy Outlook for Both Countries and Implications
The monetary policies of Japan and Korea are expected to show different directions for the time being, providing important implications for financial markets and economic actors.
First, the Bank of Japan (BOJ) is likely to continue gradual interest rate normalization. With Japan's inflation rate exceeding 2% and wage increases continuing, conditions for monetary policy normalization are being met. However, rapid interest rate hikes could negatively affect financial market stability and economic recovery, so a gradual and cautious approach is expected. Market experts forecast that Japan's base rate will rise to the level of 1.0-1.5% by 2025. Along with this, the large-scale asset purchase program (quantitative easing) that has been implemented for a long time is also expected to be gradually reduced. This monetary policy normalization could serve as a signal for Japan's complete escape from the "lost 30 years" and restoration of a normal economic virtuous cycle structure.
Second, the Bank of Korea is expected to transition to a rate-cutting cycle. Currently, Korea's base rate is 3.5%, which is relatively high considering the real economy situation. As the inflation rate stabilizes and concerns about economic slowdown grow, the Bank of Korea is likely to cut rates in the first half of 2025. In particular, factors such as household debt burden, real estate market stagnation, and labor market weakening increase the need for rate cuts. However, a cautious approach is expected that comprehensively considers the direction of the US Federal Reserve's monetary policy, won exchange rate stability, and financial imbalance risks. The market predominantly expects the base rate to fall to the level of 2.5-3.0% by the end of 2025.
Third, the decoupling of monetary policies between the two countries is likely to continue for a considerable period. Since the global financial crisis, central banks of major countries have generally pursued monetary policies with similar directions, but recently, policy divergence according to the economic situations of individual countries has been appearing. In the case of Japan and Korea, they are likely to maintain opposite monetary policy directions for the time being due to differences in their economic cycles. This policy divergence will act as a factor expanding the interest rate difference and exchange rate volatility between the two countries. It could also affect international capital flows, potentially causing simultaneous capital inflow to Japan and capital outflow pressure from Korea.
Fourth, these environmental changes provide new challenges and opportunities for economic actors. For businesses, exchange rate risk management becomes even more important with increased exchange rate volatility. In particular, industries competing with Japan need differentiation strategies through enhanced non-price competitiveness. From an investor's perspective, it is important to adjust investment strategies considering the interest rate differences and currency value changes between the two countries. The attractiveness of investing in Japanese assets could increase, while for Korean assets, opportunities could arise in terms of valuation. Policy makers need to strengthen monitoring of the international spillover effects of monetary policy and changes in capital flows, and prepare appropriate policy responses if necessary.
In summary, the decoupling of monetary policies between Japan and Korea could be a significant challenge for the economies and financial markets of both countries, but it could also serve as an opportunity for improving economic fundamentals and strengthening competitiveness. In particular, it needs to be understood as a process of reestablishing the economic structure and growth paradigm of each country from a long-term perspective. Japan faces the task of escaping deflation and restoring a normal economic virtuous cycle structure, while Korea faces the task of diversifying growth engines and transitioning to qualitative growth. In this process, monetary policy will play an important role, and the different policy directions of the two countries can be seen as reflecting the unique economic situations and challenges of each country.
4️⃣ In Conclusion
The phenomenon of Japan's 30-year government bond yield surpassing Korea's is an important signal reflecting not only a change in financial indicators but also structural changes in both economies and a change in market perception of future outlook. Japan is entering a phase of economic normalization after escaping long-term deflation, while Korea is facing growing concerns about economic slowdown due to high interest rates. This decoupling of economic cycles is acting as a major factor in the interest rate and exchange rate fluctuations between the two countries.
The Bank of Japan (BOJ) has ended its zero interest rate policy after 17 years and started raising rates in response to price increases and economic recovery. This signifies the end of the era of low growth and deflation called the "lost 30 years" and the restoration of a normal economic virtuous cycle structure. In contrast, the Bank of Korea is expected to transition to a rate-cutting cycle as concerns about economic slowdown due to high interest rates grow. Factors such as export difficulties, real estate market stagnation, and household debt burden increase the need for rate cuts.
This decoupling of monetary policies between the two countries is likely to lead to pressure for a stronger yen and a weaker won. A stronger yen could affect Japan's export competitiveness and decrease import costs, while reducing Korea's exports to Japan and increasing import costs. It is also expected to bring changes to tourism, consumption, and investment patterns.
For businesses, risk management for increased exchange rate volatility and strengthening non-price competitiveness become important. In particular, industries competing with Japan need differentiation strategies through technology, quality, brand, etc. From an investor's perspective, it is important to adjust investment strategies considering the interest rate differences and currency value changes between the two countries. Policy makers need to strengthen monitoring of the international spillover effects of monetary policy and changes in capital flows, and prepare appropriate policy responses if necessary.
In conclusion, Japan's interest rate rise above Korea's and the outlook for a stronger yen can be seen as signals of a new phase for the economies of both countries. While these could be challenging factors in the short term, they could also serve as an opportunity for improving economic fundamentals and strengthening competitiveness of both countries in the long term. What's important is to accurately understand these environmental changes and adopt a strategic approach to use them as new opportunities with appropriate responses.