Deputy PM: Yen-Carry Trade Could Lead to Another Financial Crisis

Deputy Prime Minister and Minister of Finance and Economy Kwon O-gyu said yesterday that a sudden withdrawal of investments funded by borrowed yen could spark a huge crisis like the financial meltdown in 1997.

Yen-carry trade refers to the practice of investors borrowing a low-yielding yen to invest in higher-yielding currencies and assets for gains from interest rate differences.

Deputy Prime Minister Kwon said in a posting on the Finance Ministry’s website titled “After Visiting the Asia Pacific Economic Cooperation Financial Ministers’ Meeting” that the talks discussed the U.S. subprime mortgage situation and a possibility of clearing of yen-carry trade investments as risk factors for the global financial market.

Kwon added that the yen-carry trade was behind the instability of the international financial market and that excessive transactions to gain profits from interest rate differentials could disturb the macro economy of the country where investments were made.

As a classic example, he pointed out that enormous amount of capital from Japanese banks, which flooded into Finland, Norway, and Sweden in the 1980s, hiked up prices of assets including properties in the three Nordic countries.

In addition, he explained that withdrawal of funds by Japanese banks in November 1997 affected non-Japanese banks to follow in their footsteps ultimately setting off the financial crisis in Korea.

He also projected that the yen-carry trade will continue to be on top of the agenda as financial ministers around the world joined Korea in raising the issue.

higgledy@donga.com