A Korean businessman promotes a hair flattener to Japanese buyers at a KOTRA sponsored export information session at the trade group’s headquarters in Seoul. / Courtesy of KOTRA

By Kim Jae-han
Director of Regional Headquarters for Japan, KOTRA

Korean exporters to Japan are currently reeling under the shrinking yen. As the weaker yen erodes export profits, the choice for them is restricting: either export at a loss or cut exports. Subsequently, a drop in their factory utilization rate would lead to a loss of buyers. The persisting decline of the yen, for well over three years now, has been a big blow to firms relying heavily on exports to Japan.

Export performance during the first half of this year is clear indication of its demise, as shipments to Japan, for a short while, appeared resilient to exchange rate fluctuations. The weak yen, however, finally took its toll. In the first half of 2007, exports grew by only 0.8 percent, raising the trade deficit with Japan to $ 14.4 billion.

Most firms exporting to Japan are selling at a loss, as 100 yen has fallen well below the 852 won reported in a KOTRA study from March this year as the break-even exchange rate. The thinning export margins have forced some of the companies that have been exporting to Japan through KOTRA's overseas subsidiary program to drop out of the marketing arrangement. Even those companies staying the course saw their sales dwindle in favor of Taiwanese or Chinese exporters offering cheaper prices. Quite a few Tokyo branch offices of Korean trading firms are talking about folding their tents, saying how the high prices of made-in-Korea products are sapping their marketing operations.

The worst part of it all is that Japan's depreciating currency is showing no signs of a rebound anytime soon. One major contributing factor to the continuing weakness of the yen is yen-carry trades, whereby investors profit by borrowing Japan's low interest rate currency to invest in financial products in high interest rate countries. Japan's current interest rate of 0.5 percent is still a fraction of the going rates in the U.S. or EU nations, and the chance for a sudden interest rate hike remains extremely small, due to its domestic economic situations.

Hence, we cannot bet on any improvements from external sources in the near future. Any solutions we may find have to be internal. The obvious prescriptions for businesses will be structural adjustments and technological development. Meanwhile, the government should do its share by working out policy-level solutions that can provide an effective buffer against rate fluctuations for Korean businesses.

What Korean companies should first tackle is inefficiencies related to their production processes and input factors. Any inefficiencies that can be dealt with immediately should be eliminated. For others that will take time and money to resolve, and it is advisable to have and implement a long-term improvement plan. In the strong yen years of the 1980s, Japanese companies coped by improving their productivity: they standardized manuals, curtailed production cycles, and multi-tasked all employees. They managed to mitigate the strong downward price pressure from buyers through enhancement in processing efficiency.

The Japanese market is an utterly consumer-centered and competitive market where price competition is fierce. Raising prices is not an option for Korean exporters, as their products have to compete with cheap Chinese goods. Their only real option is to come up with new product ideas that stand out by their originality and technological competitiveness. Meanwhile, moving production bases to cheaper countries may indeed be a solution to lower the cost of production. However, without a well-planned approach, having factories overseas can turn out to be costly. For this type of arrangement to yield the intended benefits of cost cuts and increased price competitiveness, the move needs to be carefully planned by thoroughly examining all factors influencing the outcome.

Foreign exchange rates are determined through a complex mechanism, where a multitude of variables related to the world economy are factored in. The best a company can do is to build an operations model less exposed to exchange rate fluctuations. The Plaza Accord, a coordinated intervention for the devaluation of the U.S. dollar in the 1980s, dealt a severe blow to Japan's small and medium-size companies. Japan competitiveness today is owed in large part to the wisdom demonstrated by its companies, decades ago, to overcome this seemingly insurmountable challenge to their export sector.

The weak yen, although a setback in the immediate term, may prove to be an opportunity for Korean companies. It could allow them to rethink their way of doing business and introduce some constructive changes to their operations model. These changes should not only aim at an increase in price competitiveness, but also acquiring capabilities to give oneself a unique market position. Companies that have a unique selling point are strong enough to ride out any setbacks in the market.

The government's role is also crucial in remedying the situation. Although it is best that foreign exchanges rates are left to be decided through market mechanisms, the current won-yen exchange rate is too exorbitant to make economic sense, and surely spells disaster for Korean export firms. The devaluation of the yen has been simply too steep for the government to cross their arms and watch. The improvement of productivity at the company level alone won't suffice.

The government should wake up to the fact that the many measures it undertook to stabilize foreign exchange rates failed to create a dent in the market, and that exporters are struggling. Korean policymakers should learn, for instance, from the example of Japan which, in spite of a huge trade surplus with the U.S., managed to obtain the latter's support for its decision to delay the appreciation of the yen, on account of the domestic recession.
It is in the interests of any country whose economy so heavily depends on exports like Korea to aggressively respond to market developments undermining its ability to viably compete internationally. Also, given how Japanese buyers are known for their reluctance to change trading partners, any ground lost by Korean exporters at this juncture will not be easily gained back.

This is one more reason why the government must become more sensitive to the cause of exporting firms and extend them a helping hand regarding the won-yen exchange rate.