Uncertainty in global financial markets is growing as Japan's benchmark interest rate has risen to its highest level in 30 years since 1995. The Bank of Japan (BOJ) raised its policy rate by 0.25 percentage points from 0.5% to 0.75% on January 19. After announcing the rate hike, the BOJ made clear the possibility of further increases, stating it "plans to continue raising the policy rate in line with improvements in the economy and prices."
Immediately following the rate hike, Japan's 10-year government bond yield broke through the psychological resistance level of 2%, reaching its highest point in 19 years since 2006. However, the feared financial market shock has not materialized so far, with Korea's stock and foreign exchange markets showing stability.
Yet it is too early to be complacent. When the BOJ raised its benchmark rate to 0.25% on July 31 last year, investment funds presumed to be yen carry trade money fled the market, causing the KOSPI to plunge 8.77% in a single day on August 5. If Japanese government bond yields rise, yen carry trade funds invested in the United States and elsewhere could flow back to Japan, potentially causing significant turbulence in global financial markets. In such a scenario, risk-averse sentiment could push the won-dollar exchange rate even higher, accelerating inflation and worsening business conditions for domestic small and medium-sized enterprises. For Korea, with its high dependence on external factors, there is no room for complacency.
Despite Korean companies facing external headwinds from global trade wars and financial market instability, the government continues to turn to businesses only when it needs help. Kim Yong-beom, senior presidential secretary for policy, pressured major exporters to sell their dollar holdings at a meeting with chief financial officers from seven major export companies on January 18, telling them "not to seek small gains." The government sought corporate cooperation as its high exchange rate measures reached their limits.
Before the Korea-U.S. summit in the past as well, companies made significant contributions to tariff negotiations at President Lee Jae-myung's request. But what they received in return were measures pressuring businesses, including the Yellow Envelope Act, Commercial Act amendments, and corporate tax increases. This stands in stark contrast to the Japanese government's efforts to boost investment vitality, such as providing tax benefits for large-scale corporate capital investments.
The fundamental cause of exchange rate instability lies in weakened confidence in the Korean economy as a whole. The government should stop merely paying lip service to being "pro-business" and instead focus all efforts on strengthening economic fundamentals and discovering new growth engines through structural reforms and deregulation.