Preparing for joint intervention? Korean and Japanese foreign exchange officials meet to discuss strengthening bilateral cooperation

According to Zhitong Finance APP, the highest-ranking foreign exchange officials from South Korea and Japan held talks in Tokyo on Friday to discuss ways to strengthen bilateral cooperation. According to a statement issued by the South Korean Ministry of Finance, Vice Minister of Strategy and Finance Moon Jisung met with the Vice Minister of Finance for International Affairs of Japan, Atsushi Mimura. The statement said both sides exchanged views on recent developments in the global economy and financial markets, and introduced their respective policy responses. They also exchanged positions on issues facing multilateral mechanisms such as ASEAN+3 and the G20, and discussed the 11th Korea-Japan Finance Ministers' Meeting, which will be hosted by South Korea. Both parties indicated they would continue to maintain close contact at both the working and senior levels.

This meeting marked the first high-level bilateral contact between South Korea and Japan since the actions taken on July 31. Just three weeks ago, the United States and Japan made a rare coordinated intervention in the foreign exchange market, causing sharp fluctuations in regional currency markets and helping the Korean won and Japanese yen strengthen. On July 31, Moon Jisung stated that the foreign exchange authorities of the United States, South Korea, and Japan maintained close contact. Although Moon Jisung refused to confirm whether South Korea had also intervened, media cited a market insider who wished to remain anonymous as saying that South Korean authorities had sold US dollars.

It is worth noting that although the yen and the won moved in tandem for two days after the intervention at the end of July, the two currencies have since diverged. At the time of writing, the yen is trading at 158.6 yen to the dollar, retracing some of the gains driven by the intervention, while the US-Japan interest rate differential and concerns about Japan's fiscal outlook continue to put pressure on the yen. The Korean won, on the other hand, has continued to strengthen against the dollar, this week breaking the key 1,400 won per US dollar mark for the first time in over ten months, trading at 1,385.15 won per US dollar at the time of writing, the strongest level in 11 months.

As the yen once again approaches the significant threshold of 160 yen per US dollar, its future trajectory will be influenced not only by potential intervention actions and concerns about Japan's fiscal prospects, but also by the Bank of Japan's policy moves.

Many speculators believe that the Bank of Japan is under pressure to raise interest rates as a complement to the government's intervention in the currency market. According to earlier reports, the Japanese government and the central bank have reached a consensus that an interest rate hike is “necessary in the near future.” Should the yen remain weak and inflation accelerate, prompting the Bank of Japan to act more quickly, the yen could receive stronger support. Pricing in the Overnight Index Swap (OIS) market shows the probability of a rate hike by the Bank of Japan at its September meeting is about 80%.

Meanwhile, the unprecedented shareholder return plans of South Korea’s two major memory chip giants are gradually becoming a key factor affecting the won's movement. If these two companies raise funds in the local currency market to support their shareholder return programs, the won may continue its recent upward trend.

On Wednesday, SK Hynix (SKHY.US) announced it would buy back and cancel 40 trillion won (approximately $28.6 billion) worth of shares, and will use more than 50% of its free cash flow generated between 2025 and 2027 to enhance shareholder returns. According to sources, SK Hynix has also reached a preliminary wage agreement to deliver 60% of this year’s employee bonuses in company stock, with the remaining 40% in cash. In addition, the Samsung Electronics board of directors met today and approved the 2026 shareholder return plan, expected to total about 90 to 110 trillion won.

Investors are watching how much demand for the won will be generated by SK Hynix and Samsung Electronics’ shareholder return plans, and how much of the proceeds may eventually be repatriated overseas by foreign shareholders. Citigroup estimates that if foreign equity investors repatriate funds to their home countries, about half of these shareholder return plans may ultimately be converted back into US dollars. However, Citigroup Korea Chief Economist Kim Jinwook wrote in a report that these shareholder return plans should, overall, be a net positive for the won, as the companies will need to convert more of their export earnings into won. He added that robust exports, dollar financing, proactive currency conversions by the private sector, and hedging activities together constitute factors supporting the won’s appreciation.