By Kim Tae-gyu
Staff Reporter
From the perspective of Korea Inc., what if recession hits Japan as it did during the 1990s? The question has been springing up after the Japanese government recently addressed deflation.
Late last week, Tokyo warned that its economy might be back in deflation, the trend of falling prices that plagued it more often than not in the past, for the first time in three years.
Market watchers point out that sustained deflationary pressure, which resulted in a decade-long economic slump in Japan in the 1990s, would negatively affect the Korean economy.
``Everyone knows that Japan has been in a mild deflationary phase. Accordingly, the public announcement itself won't weigh much on the world's second-largest economy or that of Korea,'' said Kim Hyeun-wook, a researcher at the state-run Korea Development Institute.
``However, things will be different should the nation suffer turmoil over a long period of time ― Japanese tourists will not visit Korea and our manufacturers could lose important export destinations,'' he said.
Deflation refers to a decline in general price levels. It dents economies by generating a vicious circle ― consumers become reluctant to spend as they expect prices to go down in the future.
This prompts companies to slash production, leading to massive layoffs and further reduction in consumption, which, in turn, cause more production cuts.
Professor Kim Sang-jo at Hansung University worried that protracted deflations in Japan might undermine the competitiveness of Korea's exporters such as Samsung Electronics and Hyundai Motor.
``Any prolonged crisis in Japan is feared to prod the country to weaken its currency to revive the economy through brisk outbound shipments,'' said Kim, who also works as a progressive civic group activist.
``With the Chinese yuan pegged to the dollar at depreciated levels, the weakening Japanese yen is expected to hurt the price competitiveness of Korea's major corporations.''
Recently, there have been projections that China may re-evaluate its currency against the green back in the face of pressure from the United States. But Kim contended that the value of the yuan would still be lower than its market value, even after the revision.
``The yuan may get stronger but it would not be sufficient to embrace all the market voices. If the Japanese yen depreciates in this climate, our exporters would struggle in the global markets because most of them are under stiff rivalry with Japanese and Chinese players,'' Kim said.
``Then, the rosy outlook of the Korean government that the national output will rise upside of 4 percent next year would be unattainable.''
China has pegged the yuan at 6.83 a dollar since July last year. As the Korean won has substantially strengthened against the dollar this year, the currency also gained equally against the yuan.
The Korean won, which was traded at higher than 1,600 won per 100 yen early this year, has gotten stronger to move in the neighborhood of 1,300 won per 100 yen currently.