Japan Rate Hike Seen as Key Driver of Won Strength

The Federal Reserve and Japan's Central Bank are expected to raise their benchmark interest rates this week, with significant implications for the value of the won. The US Federal Reserve is likely to increase its rate from 3.5% to 3.75%, while Japan's Central Bank is expected to hike its rate by 0.25 percentage points to 1.25%, the highest level in 31 years.

According to a survey of 14 experts, all forecasted a Japanese rate hike, with some analysts arguing that it's necessary to end the weak yen. The current interest rate gap between the US and Japan is acting as a driver of yen weakness, making a rate hike crucial for stabilizing the currency.

Domestic experts believe that Japan's rate hike will have a bigger impact on the won than the US policy. A recent recoupling trend has seen the yen and won strengthening together, with the yen-dollar rate moving from 159.82 to 154.4 and the won-dollar rate moving from 1,370.4 to 1,347.3. If this trend holds, a Japanese rate hike could translate into won strength.

By contrast, analysts say dollar strength from a US rate hike may be limited due to America's massive fiscal deficit and ongoing Middle East war. Bloomberg reported that the likelihood of dollar strength is seen as low, with JP Morgan commenting that countries with higher rates may be able to withstand two to three hikes by the Fed.

Min Kyung-won, a Woori Bank researcher, said that 'in the global FX market, a rate hike by Japan's Central Bank is being reflected more directly in the won's value than the U.S. Fed.'