Korea’s financial regulator and central bank are bolstering their monitoring of the foreign exchange market ― investments from funds raised in Japan in particular ― amid the feasibility of sparking the so-called “yen carry trade.”

Taking advantage of Japan’s low interest rates and cheap currency, more and more investors are borrowing the yen from Japanese banks either to use the loans as capital or to invest in Korean stocks and other assets.

“Though the current impact on the local market is minimal, we cannot rule out the possibility of yen carry trade,” said an official of the Financial Supervisory Service. Yen carry trade is the practice of borrowing low-yielding yen to invest in higher-yielding assets in other countries with higher interest rates.

He said the potential continuation of such fund movements is feared to spur asset bubbles and risks in the foreign exchange markets in countries with higher-yielding assets.

The Bank of Korea, in its research report, also issued a warning against potential expansion of yen carry trade. The central bank report highlighted prospects for the yen’s further weakness.

The yen lost its value further against the U.S. dollar to close at over 100 yen per the greenback on Monday. Some analysts in Korea said that the yen’s weakness is likely to continue due to “Abenomics” ― an aggressive monetary easing to boost the economy led by Japanese Prime Minister Shinzo Abe.

Samsung Futures research analyst Jeun Seung-ji predicted that the U.S. currency could appreciate to the level between “110 and 120 yen” per dollar by the end of this year.

Several foreign investment banks including JPMorgan, Morgan Stanley and BNP Paribas forecast that the dollar will rise to 105 yen in early 2014.

At the end of 2012, there was no investment bank which projected 100 yen per dollar for late 2013. Most of them had said the yen-dollar rate would stay in double digits.

A Woori Financial Group research analyst estimated that Korean enterprises could suffer a combined loss of 21 trillion won should the dollar climb to 110 yen and slide to 1,000 won.

According to Japan’s Finance Ministry, Japanese investors purchased a net 28.2 billion yen ($280 million) in Korean stocks and bonds in February and March, compared with a net sale of 29.7 billion yen in January.

They also snapped up a net 463.6 billion yen in overseas stocks and bonds for two weeks from April 21.

By Kim Yon-se (kys@heraldcorp.com)