The tax, abolished in May 2009, helped drive over $18 billion in foreign capital to the Korean bond market this year alone. At the moment, non-Korean interests have nearly doubled their aggregate holdings of won bonds to 7.1% of the entire market.
The Finance Ministry is backing efforts to revive the tax “to mitigate the risk of excessive volatility in capital flows” that make the won’s exchange rates more volatile.
Even though Korean interest rates are relatively low by Brazilian or Indian standards, they are still significantly higher than what Western European, Japanese or North American investors could get at home.
And as the Federal Reserve launches a $600 billion bond-buying program, some central bankers increasingly fear that all that money could only displace a greater share of global capital to emerging markets. The logic is fairly compelling: as the Fed’s buying keep Treasury interest rates artificially depressed, traders will continue to hunt higher yields overseas.
In any event, making new flows into the Korean bond market 14% less welcome may help restrain the won from further appreciation — the currency has climbed 6% since the end of June — and step up the pressure on Japanese manufacturers in particular.
When both the won and the yen are relatively strong, neither country’s exporters have an advantage. But if, for example, the won stops getting stronger but the yen keeps appreciating, suddenly Korean manufacturers have a relative advantage.
And more immediately, restraining the won knocks out a source of potential upside for the broad emerging currency fund in the WisdomTree Dreyfus Emerging Currency ETF (NYSE:CEW):
Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.
About Tim Seymour: Tim is a founder of Emerging Money. He is a founder and Managing Partner at Seygem Asset Management, and The Emerging Markets Contributor to CNBC. Seygem Asset Management focuses on investing throughout the global emerging markets asset class. With a view that emerging and developing economies will continue to outpace the economic growth and advancement of developed economies, Seymour has devoted a career to investing in the dominant markets of tomorrow, today. Seymour’s career has included significant experience in both alternative asset management (hedge funds) and capital markets, having launched two hedge funds, and built the largest Russian broker dealer in the USA. Seymour started his career at UBS, focusing on international credit (cash, swaps, forex) in a specialized hedge fund group (New York). Seymour completed the firm’s training program after graduating with an MBA in international finance from Fordham University. Seymour received his undergraduate degree at Georgetown University.