By Yoon Ja-young
A stronger yen against major currencies is raising hopes that the strength of the Japanese currency could be a boost to Korea’s exporters and help them gain a competitive edge against Japanese rivals overseas.
The yen-dollar rate fell to 107 yen per greenback on April 12, the lowest since October 2014. The yen gained 11 percent in value this year, a steep rise for a major currency.
Behind the sudden strengthening is an expectation that the U.S. would not raise its key rate as steeply as previously estimated. As the United States’ long-term rate is expected to remain low, market players are selling dollars while purchasing yen.
A stronger yen raises prices on Japanese products in overseas markets where they are competing with Korean steel, chemical and other major products.
Kim Moon-il, an analyst at Eugene Investment and Futures, said that the United States’ April FOMC, scheduled this week, will determine the direction of Japan’s currency.
“The recent strengthening of the yen was due to the U.S. Fed’s hinting of a ‘slow’ key rate hike,” he said. “If it signals a hike for June, it will likely induce a higher yen/dollar rate, which will lead to the rising Nikkei index and weak yen.”
If the U.S. Fed doesn’t hint at a key rate hike for June and remains dovish, the dollar will weaken against most currencies. Then concern over a strengthening yen will increase and the Nikkei index will face downward momentum.
“The BOJ will likely announce expanding the minus rate policy or additional buyout of assets, but they will be effective for only the short term as the U.S. Fed overwhelms BOJ in terms of impact,” Kim said.
“A slow key rate hike by the U.S. Fed can help stabilize currencies of emerging countries, but it may cause side effects for BOJ and ECB which are moving in the opposite direction of the U.S. Fed.”
Another factor strengthening the Japanese yen is withdrawal of yen-carry trade. In yen-carry trade, investors use low-interest-rate yen for investment in stocks and bonds of other countries to seek higher investment returns.
Lee Ha-yeon, an analyst at Daishin Securities, said the strong yen is likely to continue for the time being.
“Since Japan’s quantitative and qualitative expansion in October 2014, the Japanese invested around 37.9 trillion yen in financial assets overseas,” Lee said. “As BOJ is likely to only fine-tune the pace of the yen’s strengthening rather than intervening to weaken its value, the yen-carry trade investors may withdraw their investments due to losses from foreign exchange rates. Their withdrawal will accelerate the strengthening of the Japanese yen even further.”
The strong Japanese currency is adding to hopes that Korea’s faltering exports may turn around. Korea’s exports have been falling for 15 consecutive months, on low oil prices and an economic slowdown in China.
Lee Sang-jae, an economist at Eugene Investment and Securities, said the strong yen will help Korean exporters.
“The export similarity index between Korea and Japan increased from 0.438 in 2010 to 0.517 in 2014,” he said. “The strengthening of yen that started in 2016 is a green light for Korea’s exports recovery.”
Automobiles, petrochemicals, semiconductors and machinery are some of the beneficiaries, he said.