Yen's Resurgence Could Spark Rebound for Asia’s Lagging Won Amid Policy Shifts
- The South Korean won is expected to rebound in tandem with the Japanese yen, as the two currencies show their strongest correlation in nearly two decades due to converging US-Japan monetary policies.
The South Korean won, currently emerging Asia’s worst-performing currency, may find a lifeline in the appreciating Japanese yen. Data shows that the correlation between the two currencies has surged to its highest level since 2007, with a correlation coefficient of 0.55—significantly higher than the won's link to the Chinese yuan. This synchronization suggests that as the yen strengthens due to shifting monetary policies, the won is likely to follow suit. The primary driver of this alignment is the potential convergence of US and Japanese interest rates; if the Federal Reserve cuts rates while the Bank of Japan hikes them, the resulting upward pressure on the yen would likely drag the won up with it, offering relief to Seoul’s battered exchange rate.
In Japan, the financial landscape is being reshaped by the aggressive fiscal policies of the new Prime Minister, Sanae Takaichi. A disciple of "Abenomics," Takaichi has approved a massive $135 billion economic stimulus package targeting 17 strategic industries, including AI, semiconductors, and defense. This injection of liquidity has triggered a sharp spike in Japanese Government Bond (JGB) yields, which jumped from 1.63% to 1.8% in just a few days. While the media has framed this volatility as a crisis, a broader analysis shows it is part of a year-long normalization trend where yields have steadily risen from 1.1%.
Despite the alarmist headlines, fears regarding the "unwinding" of the yen carry trade appear overstated. The carry trade—where investors borrow cheap yen to buy higher-yielding assets abroad—has been slowly eroding all year as the yield spread between the US dollar and the Japanese yen has narrowed. The spread currently sits at around 2.2%, down from 3.5% earlier in the year. Because this unwinding has been gradual rather than sudden, the recent spike in JGB yields is unlikely to cause the catastrophic market shock that some analysts have predicted.
For global investors, the most actionable opportunity arising from this situation lies in Japanese equities. The government’s stimulus plan effectively floods the market with liquidity (as measured by M2 money supply), a condition that historically boosts stock prices. While the stimulus might cause short-term bond volatility, the direct capital injection into key industrial sectors creates a bullish environment for Japanese companies. Investors willing to look past the currency risk—or those who see the current exchange rate of ~160 yen to the dollar as a stable entry point—stand to benefit from this policy-driven growth.
To capitalize on this trend without picking individual stocks, investors should compare two primary Exchange Traded Funds (ETFs): the iShares MSCI Japan ETF (EWJ) and the iShares MSCI Japan Value ETF (EWJV). EWJ is a broad-based fund with heavy exposure to the industrial and technology sectors, which aligns perfectly with the government's new strategic focus on AI and manufacturing. It has a higher beta (0.75), meaning it is more volatile but captures more upside during growth periods.
In contrast, EWJV focuses on "value" stocks and is heavily weighted toward financial institutions. While it offers a lower expense ratio (0.15% vs. EWJ’s 0.5%) and lower volatility, its sector allocation misses the mark for this specific stimulus play. Since the government’s spending is targeted at high-tech and industrial growth rather than banking, EWJV’s heavy reliance on financials makes it a less optimal vehicle for capturing the immediate benefits of Prime Minister Takaichi’s economic package.
Ultimately, while both funds are rated as "Buys," the current macroeconomic environment favors the broader EWJ. The combination of rising liquidity, a stabilizing yen, and a government pouring billions into tech and defense sectors creates a specific tailwind for the industrial giants held in EWJ. Investors looking to ride the wave of Japan’s new fiscal era should prioritize exposure to the industries actually receiving the government's cash, rather than seeking safety in undervalued banks.