The South Korean won and Japanese yen, long lumped together as Asian currencies that moved in tandem, are now clearly walking different paths. The won/dollar exchange rate, which at one point surged to the mid-1,500 won range, has rapidly retreated to the mid-1,300 won level. The yen/dollar rate, by contrast, remains stubbornly stuck in the late 150 yen range despite the Bank of Japan’s rate hikes. Both countries run large current account surpluses, but analysts point out that the different sources of those surpluses are determining the contrasting fortunes of the two currencies in foreign exchange markets.
On the 23rd, the won/dollar rate closed weekly trading on the Seoul foreign exchange market at 1,357.5 won, up 0.2 won from the previous session’s close. The yen was trading around 157 per dollar. The Bank of Japan raised its policy rate to 1.25% this month, the highest level in 31 years, yet yen weakness remains unresolved.
As yen depreciation has persisted, concerns have emerged at the highest levels of the U.S. government. President Donald Trump recently raised concerns about yen weakness during a summit with Japanese Prime Minister Sanae Takaichi. Japanese Finance Minister Satsuki Katayama disclosed this at a press conference after a cabinet meeting on the 25th, stating that “it is unusual for the government to publicize exchange-rate-related remarks by the two countries’ leaders.” Market participants interpreted the disclosure as an attempt to curb excessive yen selling amid renewed yen depreciation.
The remarks triggered yen buying in currency markets. The yen/dollar rate strengthened to 158.33 yen on the morning of the 25th, and further to 158.28 yen in the afternoon. However, no announcement of additional joint currency intervention followed, and the yen-buying momentum did not last.
The Quality of the Surplus Differs
In recent years, the won and yen have tended to move in similar directions. This was largely because both currencies shared common depreciation factors: widening interest rate differentials with the United States and increased overseas investment by domestic investors. Recently, however, clear differences have emerged in the two countries’ foreign exchange supply-demand conditions. The biggest difference is the composition of their current account surpluses.
South Korea’s current account surplus from January through July this year reached $233.1 billion — roughly four times the $59.8 billion recorded in the same period last year. In July alone, the goods surplus hit $40.4 billion. The surge reflects a sharp increase in foreign currency inflows from goods trade, led by semiconductor exports.
South Korea’s current account surplus comes mostly from the goods balance. When export companies convert dollars earned overseas into won for domestic wages, investment, or dividends, it creates upward pressure on the won in foreign exchange markets. Market participants believe South Korea has entered a phase this year where foreign currency supply through the current account exceeds capital outflows through overseas direct investment and securities investment. In particular, if semiconductor companies expand domestic investment and shareholder returns, demand to convert export-held dollars into won could grow further.
Japan’s situation is different. Japan posted a record current account surplus of ¥17.4292 trillion (approximately $110.9 billion) in the first half of this year, but its trade surplus was only ¥742.1 billion (approximately $4.7 billion), and a ¥1.8223 trillion (approximately $11.6 billion) services deficit pushed the combined trade and services balance into a ¥1.0802 trillion (approximately $6.9 billion) deficit. What filled the gap was a primary income surplus of ¥20.4914 trillion (approximately $130.4 billion).
Primary income refers to dividends and interest earned from overseas direct investment and securities investment. It is money that Japanese companies and investors earn from assets accumulated through massive past overseas investment. Since the 2010s, Japan’s current account surplus has been structurally supported by investment income from overseas assets rather than goods trade.
The problem is that investment income earned abroad does not necessarily translate into yen buying. If overseas subsidiaries reinvest profits locally or continue to hold them in dollar-denominated or other foreign currency assets, the income counts as Japanese earnings in balance of payments statistics but generates no demand for yen in foreign exchange markets. This is why Japan struggles to escape yen weakness despite record current account surpluses.
Pressure from Rates and Capital Flows
Even with the Bank of Japan’s rate hikes, the interest rate inversion between the U.S. and Japan persists, and Japanese investors continue to invest overseas — both factors weighing on the yen. Analysts note that a genuine yen strengthening phase would require funds that have flowed abroad to return to Japan.
Japanese government bond yields are also rising sharply. On the 25th, the 10-year JGB yield briefly climbed to 3.115%, the highest level in about 30 years since August 1996. The previous day, the 5-year yield briefly rose to 2.380%, setting an all-time high. Amid rising U.S. long-term rates, yen selling and dollar buying continue as markets focus on the widening U.S.-Japan rate differential.
Japanese authorities are keeping the door open to market intervention. Japan and the United States conducted joint currency intervention in late July, but the yen/dollar rate subsequently re-entered the 160 yen range. The Bank of Japan raised its policy rate by 0.25 percentage points to 1.25% on the 18th of this month, but two dissenting votes dampened expectations for the pace of further hikes, and the yen actually weakened to the 158 yen range. Authorities reportedly conducted a rate check afterward, inquiring about exchange rate levels with market participants. Immediately after the rate check, the yen/dollar rate strengthened to the late 156 yen range, but this week it has weakened again to the 158 yen range.
Market participants are paying attention to the possibility that the won and yen, which have moved in tandem, will diverge going forward. Lee Jung-hoon, an economist at Daishin Securities, said, “While won-yen co-movement has deepened over the past several years, not everything is the same. South Korea is offsetting the capital outflow pressures that have plagued the won with this year’s overwhelming trade surplus, whereas Japan has been unable to earn money through trade since the 2010s.”
He added, “While it’s difficult to say that won-yen co-movement has completely ended just because the won showed rapid strength in the second half, looking ahead one to two years, the fundamental differences between the two countries are quite stark, and the yen has limited room to strengthen further relative to the won.” He suggested the won/yen cross rate could fall below 850 won per 100 yen by next year.
| Indicator | South Korea | Japan |
|---|---|---|
| Current account surplus size | $233.1 billion (Jan–Jul) | ¥17.4292 trillion (H1) |
| Main source of surplus | Goods balance ($40.4 billion in July) | Primary income (¥20.4914 trillion) |
| Trade & services balance | Surplus trend | ¥1.0802 trillion deficit |
| Currency value trend | Won/dollar recovered to 1,350 range | Yen/dollar in 157–158 range |
Note: South Korea’s current account is cumulative for January–July 2026; Japan’s is for H1 2026. Converted amounts use a won/yen rate of approximately 860 won per 100 yen.
