Exchange rate crisis, Japan and South Korea plan to take action

Why Does the Middle East Situation Put Unique Pressure on the Yen and Won Exchange Rates?

[Special Correspondent Li Zhiyin from Global Times in South Korea, Global Times Reporter Yang Shuyu, Liu Qiang] According to Reuters on the 14th, Japanese Finance Minister Shunichi Suzuki and South Korea’s Minister of Planning and Finance Koo Yun-cheol issued a statement after the “Japan-Korea Financial Dialogue” held in Tokyo, saying they are “seriously concerned about the recent sharp depreciation of the Korean won and Japanese yen,” and that they are prepared to take measures to address excessive fluctuations in the foreign exchange market.

On the 13th, the yen against the dollar briefly hit 159.6 to 1, marking the lowest level since July 2024. Many market participants believe this level could prompt Japan to intervene to support its currency. Regarding South Korea, according to Yonhap News Agency, due to the escalation of the Middle East geopolitical situation, the won’s depreciation against the dollar in March ranks among the top among major global currencies. As of March 14th, the won has depreciated 3.84% against the dollar in March, while the dollar index has risen 2.92% in the same period. Over the past two weeks, the average exchange rate of the won against the dollar was 1,476.9, reaching a new high since the Asian financial crisis in 1998; last week’s weekly average further rose to 1,480.7, the highest level since the 2009 global financial crisis, with intraday approaching the 1,500 won mark. Meanwhile, exchange rate volatility has significantly increased, with daily fluctuations reaching 14.24 won, the highest in nearly 16 years.

Regarding the recent market performance of Japan and South Korea, Saburo Shirai, Professor at Keio University’s Faculty of Policy Management, commented on social media on the 15th that the common concern over the weakening of the yen and won stems from rising energy prices and the escalation of tensions in the Middle East, which strengthen the US dollar. Both Japan and South Korea rely heavily on Middle Eastern oil supplies, making their currencies highly susceptible to downward pressure. The yen and won have sharply fallen against the dollar, and their stock markets have also declined more than those of other major countries. Some other countries have diversified their supply sources by purchasing Russian crude oil, thereby reducing the impact. Japan needs to further diversify its oil sources, and stable energy supplies may become one of the topics in the upcoming Japan-U.S. summit.

On the 13th, after the Cabinet meeting, Suzuki Shunichi stated at a press conference that “considering the impact on citizens’ lives amid soaring oil prices, we plan to take all necessary measures at any time.” He also revealed the latest moves toward strengthening international coordination. She explicitly said that Japanese authorities are communicating with relevant U.S. agencies on foreign exchange issues and will maintain “closer contact.” The Nihon Keizai Shimbun reported on the 14th that the joint statement issued by Japan and South Korea that day also mentioned their currency swap agreement, “reaffirming the importance of bilateral financial cooperation, including the bilateral currency swap agreement, and continuing to explore further improvements to such cooperation.”

The South Korean government and financial regulators have also been signaling stability measures. According to Korea Economic Daily, the Bank of Korea held a “Middle East Situation Review Working Group” meeting on March 9 to assess market risks. The Bank of Korea judged that the recent rapid rise in government bond yields and the won’s exchange rate has deviated to some extent from Korea’s economic fundamentals, constituting excessive volatility, and stated it would take appropriate market stabilization measures when necessary, including verbal interventions to guide market expectations.

Despite frequent stability efforts, South Korea’s financial markets and industry remain highly alert to the exchange rate outlook. Analysts point out that Korea’s economy is highly dependent on external energy supplies, with about 80% of oil imports coming from the Middle East. If shipping through the Strait of Hormuz continues to be obstructed, it will directly impact energy supply and trade balance, further increasing downward pressure on the won. Since March, foreign investors have net sold about 13.3 trillion won in the Korean stock market, and continued foreign capital outflows have also pushed up the exchange rate. The Korean market warns that if the high exchange rate persists, it will raise import costs and inflationary pressures, burdening businesses and residents with higher interest costs, ultimately causing tangible impacts on the real economy.

Qianhai Open Source Fund Chief Economist Yang Delong analyzed for the Global Times that although Korea and Japan currently have some oil reserves to buffer short-term supply pressures, if the Middle East conflict persists, industrial production will still face substantial restrictions. Meanwhile, continued sharp fluctuations in the exchange rate will further challenge Korea and Japan’s import-export trade, forcing related companies to face higher foreign exchange management difficulties and even potential exchange losses.