Bank of Korea Governor Rhee Chang-yong / Yonhap

The near 38-year low of the Japanese yen and the plunging Korean won against the strong U.S. dollar are emerging as major financial market volatility factors, market watchers said Tuesday.

Propelling the rapid depreciation in both currencies is the sustained global strength of the dollar underpinned by robust economic growth in the U.S. A stronger dollar attracts global funds to the U.S., depreciating currencies in other economies.

The weak yen is ascribed mostly to the Bank of Japan's negative interest rate policy of eight years, with a hawkish pivot still elusive to push up the chronically depreciated currency.

The value of the won continues on a downward move in sync with its neighboring countries including China, compounded further by calls from the ruling party and the presidential office for expedited monetary easing. The currencies of Korea and Japan will plummet further, unless the U.S Federal Reserve becomes dovish.

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Lose-lose

"A weaker won is no longer a guarantee of a cost advantage for Korea's exports relative to its Japanese competitors on the global market, since both currencies have equally registered losses against the dollar," Korea Development Institute senior fellow Jung Kyu-chul said.

Instead, a steeper decline in the value of the Japanese yen compared to the Korean won can only weaken the competitiveness of Korean exporters, particularly in the manufacturing industry.

Carmakers, shipbuilders and steelmakers can take the brunt of the short-term repricing brought on by currency fluctuations. The deficits of the service industry, as measured by the country's current account, will likely incur losses due to a surge in the number of Japan-bound tourists.

In his view, the depreciated Korean currency will significantly reduce Koreans' purchasing power due to increased import prices and higher production costs, thus weakening consumer sentiment.

"The strong pick-up in months of export growth can be eclipsed by flagging domestic demand. This can end up undermining the country's economic vigor."

According to market data, the Japanese currency breached the psychologically significant 160 yen barrier against the dollar on June 26.

The currency fell to its lowest point since December 1986.

Similarly, Korea's won hovers at around 1,370 won against the dollar after crashing to 1,396 won June 27, stopping short of the mid-April low of 1,400.80 won. The figure broke the 1,400 won barrier, due to fears of a wider war in the Middle East. Some industry analysts say the Japanese currency will tank further to 170 yen against the dollar, due to the insufficient signs of a hawkish pivot by the Japanese central bank or the dovish moves by the Fed.

"The trend of a weak yen will continue for the time being, sustained by a stalled rate cut by the Fed coupled with strong economic growth in the U.S.," Hi Investment & Securities researcher Park Sang-hyun said.

"Whether the Japanese central bank will embrace the widely expected hawkish stance to snap the current trend remains to be seen."

Meanwhile, many local retail and large investors are increasing their yen holdings in anticipation of a significant currency appreciation.

According to market data, the combined balance of yen deposited with Korea's top five commercial lenders — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup — came to 1.29 trillion yen on June 27, up 159.4 billion yen from a year earlier.

The Korean won has registered a nearly 7 percent year-to-date gain against the yen from Jan. 2 to the end of June.

Observers call for caution, saying a further decline in the yen could lead to extended losses.

The Korean currency traded at 1,388.20 won against the dollar, Tuesday, losing 8.9 won from the previous session.