A currency’s appreciation always comes as mixed news: an alarm signal for exporters and a welcome relief for inflation-weary consumers. The ongoing rise of the Korean won will likely produce more of the latter effect. That does not mean monetary policymakers can afford to just sit back and watch, especially in terms of cushioning against short-term impacts.
The Korean currency’s strengthening, to below 1,100 won per U.S. dollar for the first time in 13 months, has been widely anticipated since the QE3 ― the third phase of quantitative easing ― by the U.S. monetary authorities, followed by a competitive liquidity injection by other countries.
Already, export companies have begun whining, saying that if the currency rises by 10 won against the greenback, home appliance makers will see their operating profits fall 300 billion won, and automakers, 200 billion won. Considering that they said nothing when the government intervened to artificially weaken the Korean won, it’s time for large exporters to hone non-price competitiveness by enhancing quality, service and brand value.
The won still has a long way to go before regaining the level it had before the Lee Myung-bak administration took office. The won-dollar parity rate rose from 949 won four years ago to 1,111 won now because the government has been bent on helping the overseas sales of cars and mobile phones at the expense of spiraling inflation and dwindling purchasing power at home. It must go back even further, if possible at all, to the pre-Asian financial crisis level of 800 won per dollar.
A currency reflects the strength of a national economy, which means Korea should welcome the won’s upward movement at a time when even the U.S. and many other industrial countries are letting theirs fall down.
As always, too sudden and steep a change entails risk, however.
The government should be alert about it at least for two reasons: one is its careful and continuous support for small- and medium-sized exporters, which, unlike their larger counterparts, cannot cope with the situation by themselves. The other is a device or system to prevent abrupt outflow of foreign exchange, leaving the domestic financial markets in chaos.
If handled adroitly, the current strength of the Korean won can serve as an opportunity to reduce the economy’s undue reliance on exports, and bolster the ever-sluggish domestic demand.
Financial policymakers should not yield to temptation ― and large businesses’ breast-beating about export crisis ― to go back to easy, old ways. There’s no real growth without pain.