Korean Won rebounds, Japanese Yen drops to the lowest point... Exchange rate volatility draws attention

In January of this year, the actual value of the Korean won rebounded after experiencing seven months of decline. During the same period, the Japanese yen’s real effective exchange rate index hit its lowest level since the adoption of floating exchange rates in 1973.

The real effective exchange rate is an indicator used to assess a country’s currency purchasing power internationally. According to data from the Bank of Korea and the Bank for International Settlements, the Korean won’s real effective exchange rate index stood at 86.86 in January. This marked its first increase after six consecutive months of decline since June of last year. The index rose from the December low of 86.36, which was the lowest since the 2009 financial crisis. Looking back at Korea’s historical exchange rate fluctuations, the lowest during foreign exchange crises was 68.1, while between 2020 and July 2021, it remained above 100 for an extended period.

Recently, the strong performance of the U.S. economy has driven the dollar higher, while major Asian currencies like the yen continue to weaken. This has kept the won’s exchange rate against the dollar at a low level for a long time, with signs of stabilization only emerging recently. Notably, Japan’s January real effective exchange rate dropped to 67.73, a new low since the implementation of floating exchange rates, indicating a significant decline in the yen’s purchasing power in the global economy.

Recently, South Korea’s central bank governor Lee Chang-yong mentioned that the exchange rate has improved, stating that the end-of-year rate of 1,480 won per dollar was excessively high. Meanwhile, foreign investors have continued to net sell Korean stocks, which has had a notable impact on exchange rate fluctuations.

The foreign exchange market expects that future exchange rates will continue to be influenced by U.S. monetary policy, the trends among major currencies, and foreign exchange supply and demand conditions. The combination of these factors could further affect the value of the won. Experts emphasize the need to monitor these changes for their potential medium- to long-term positive or negative impacts on the economy.