Korean Won vs. Japanese Yen Divergence: One Stabilized by Capital Inflows, the Other Dragged Down by Fiscal Deficits
Nashnova编辑部
The Korean won surged from 1,551 to 1,414 per dollar in July; the yen slid from 157 to 163 over the same stretch — behind the divergence, one currency got a capital-reflow-plus-rate-hike fix, while the other is trapped in a tightening knot of fiscal expansion and record debt.
South Korea ran a record trade surplus — so why did the won keep falling?
Through June, South Korea's current-account surplus hit $191 billion, roughly four times the year-earlier figure — normally a textbook reason for a currency to strengthen.
Yet the won dropped from about 1,440 to above 1,559 per dollar over the same period, a decline of more than 8%, among the worst in Asia.
This means → some force was draining dollars out of Korea fast enough to overwhelm the surplus inflow.
The dollars were earned but never came home — where did they go?
Channel one: Samsung, SK Hynix, and other exporters earn revenue offshore and increasingly spend in dollars too. They no longer convert all their dollar income back into won.
In plain terms = Korean companies earn dollars and spend dollars — the money circulates offshore and never enters the won market.
Channel two: foreign investors dumped Korean equities. Through June, net equity outflows reached $110 billion; cumulative foreign selling exceeded ₩148 trillion.
This reflects the KOSPI nearly doubling in H1, which pushed Korea's weight in global benchmark indices above target — triggering passive rebalancing (fund managers selling what has risen most) and profit-taking.
Did Korea's own pension fund make the pressure worse?
The National Pension Service's domestic-equity weighting jumped from about 21% at end-March to roughly 30% by June 19. In late May, NPS raised its target allocation to 20.8% and widened the permissible band.
This means → NPS holdings far exceeded the target. Barclays estimates that rebalancing to plan would require selling about ₩130 trillion in stocks.
In plain terms = the pension fund passively became overweight Korean equities. Selling down would release short-term pressure, but once complete, foreign rebalancing flows would also shrink — ultimately easing the won's burden.
What flipped the won in July?
The won rallied from 1,551 on July 1 to 1,414 by August 11, driven by three factors stacking up.
SK Hynix completed a $26.5 billion Nasdaq listing, channeling capital back into Korea — the most direct dollar "transfusion."
The Bank of Korea announced a rate hike on July 16. Korean stocks pulled back, net foreign selling narrowed, and the combination of reduced selling pressure and a tighter interest-rate spread pushed the won higher.
Why did the yen go in the opposite direction?
The yen weakened from 157 per dollar at the start of the year to 163 by July 29 — the mirror image of the won's July rebound.
The core driver: market anxiety over Japan's expansionary fiscal stance. Prime Minister Sanae Takaichi has made growth her top priority, pairing fiscal expansion with industrial policy. On June 24 the government unveiled a ¥370 trillion public-private investment plan running to 2040, plus roughly ¥10 trillion a year in additional spending.
This means → with government debt already above 200% of GDP, another spending push led markets to price in "Japan's fiscal discipline is slipping."
Investors shorted JGBs and the yen. The 10-year JGB yield surged from about 1.7% when Takaichi took office to roughly 2.8% by early August 2026.
Why doesn't Japan just raise rates to defend the yen?
The Bank of Japan has held off because higher rates would sharply increase the servicing cost of debt exceeding 200% of GDP — a classic "raise rates to stabilize the currency vs. keep rates low to survive the debt" dilemma.
Tokyo prefers to lean on the Government Pension Investment Fund (GPIF), directing it to buy more domestic bonds and equities to support the yen indirectly, rather than using the rate lever.
After the yen broke through 164, Japan and the U.S. coordinated intervention: the New York Fed sold euros and bought yen. Treasury Secretary Scott Bessent expanded the FIMA Repo Facility — letting Japan pledge its U.S. Treasury holdings as collateral to borrow dollars without selling the bonds outright — while simultaneously pressing Japan to raise rates and normalize monetary policy.
In plain terms = the won already stabilized on a short-term cocktail of capital reflows and a rate hike. Whether the yen can escape depends on Japan raising rates without detonating a debt crisis — a contradiction with no near-term resolution.
Content is for reference only, not financial advice.