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Abstract: This paper models the real interest rate connection between Korea and Japan as a non-linear process that reacts stronger at the tails of the distribution. The model is tested using a threshold cointegration model, and some support is found for the existence of a non-linear response. If the Korean real interest rate exceeds the Japanese one by more than approximately 8%, and when the Japanese real interest rate exceed the Korean one by more than approximately 3 % then a large capital movement exists