Opposite to the Global Trend: How Will Japan's Rate Hike Affect Korea?

On August 5, 2024, the Korean stock market was nothing short of terrifying.
The KOSPI plunged more than -10% intraday, and a circuit breaker was triggered for the first time since the COVID-19 crisis in 2020.
So why did the stock market crash that day? The cause was the yen carry trade triggered by the Bank of Japan's decision to raise interest rates.
The trend in the U.S. and globally is toward cutting interest rates.
However, on that day, the Bank of Japan (BOJ) suddenly announced an unexpected rate hike.
The market, which had expected a freeze, was thrown into great confusion by the sudden announcement, and as concerns about the unwinding of the yen carry trade became reality, the stock market plunged.
The yen carry trade refers to an investment strategy of borrowing money in Japan, where interest rates are low, and investing it in countries with higher interest rates, profiting from the interest rate difference.
But when Japan raised rates, a situation arose where money borrowed in Japan had to be paid back, which meant dollars had to be sold and yen bought.
The fear of this caused a crash not only in Japan but also in the U.S. stock market.
Afterward, the stock market recovered thanks to the Bank of Japan's remarks that it would be cautious about future rate hikes and opinions that fears over the unwinding of the yen carry trade had been excessive, but these concerns cannot be said to have completely disappeared.
Japan's interest rate announcement is scheduled for January 24.
Japan's Nihon Keizai Shimbun analyzed that the Bank of Japan's statement that it would discuss a rate hike in January indicates a very high probability that it will go ahead with a rate hike.
It also offered the analysis that the Bank of Japan is likely sending a message to the market in advance about the possibility of a rate hike in order to prevent confusion like that of last August.
If the Bank of Japan raises interest rates, a stronger yen will naturally follow.
With a stronger yen, the U.S. market is bound to be negatively affected in the short term as well.
However, many analysts say there will be no confusion like last August. This is based on the analysis that the U.S., Japan and the rest of the global market are anticipating the Bank of Japan's rate hike and will have all prepared countermeasures.
Even if the Bank of Japan raises rates, if it takes a dovish stance, saying it will approach future rate hikes cautiously, the market reaction may not be large.
Because the market already has a rate hike within its range of expectations, the majority opinion is that there will be no stock market plunge like last year, though it may be negative in the short term if the Bank of Japan goes ahead with a hike this time.
If the Bank of Japan raises rates, there are also aspects that will benefit us in the medium to long term. Companies that compete with Japan, such as in semiconductors and automobiles, can take this as good news since their price competitiveness will improve.
Also, a stronger Japanese yen could increase the number of Japanese tourists, which could be good news for the lodging and travel industries.
As such, it is important to analyze both the positive and negative aspects of the Bank of Japan's rate decision, and it seems wise to watch market movements for a few days after the announcement.