The recent weakening of the Japanese yen is a source of concern for the Korean economy, especially exporters. It is undeniable for the Korean economy to undergo ups and downs often in keeping with the movement of the Japanese currency. Local companies must chart plans to brace for the end of the era of the super-strong yen.
It weakened to 83 yen to the dollar this week from 75. For the past three years, the yen has remained unprecedentedly strong despite the stagnancy of the world’s third largest economy. Now the trend is showing signs of reversing.
The global economy has shown signs of picking up. The eurozone debt crisis seems to be under control. The Bank of Japan has injected more than 10 trillion yen into the currency market under its super-loose monetary policy. It also seeks to inflate the deflated economy. A massive influx of yen worldwide has weakened the currency against the dollar and the euro.
A consensus is that the yen will head in a downward trajectory for the time being. Standard & Poor’s has cut Japan’s credit rating for the first time in nine years. Its ranking stands at AA-, the fourth highest level, which is on par with China. Japan is now the world’s most indebted country at $11 trillion, twice the size of its gross domestic product. The debt, unless managed well, is likely to trigger a global depression.
Worse yet, it recorded an unprecedented trade deficit in January, the largest on record in Japan’s history. Its economy is stagnant with the widening fiscal deficit.
Few can deny that Korean exporters have enjoyed a boom partly because they have a competitive edge in price over Japanese counterparts. The strong yen has powered local manufacturers of electronics, automobiles, electrical and chemical products.
The Korean economy has danced to the tune of the yen’s movement. In the 1980s when the yen went for 80 per dollar, the economy has enjoyed the so-called three lows ― low inflation, low interest rate and low currency.
One decade later, Korea’s trade account turned to deficit as the yen weakened to 120 to the greenback. Korea’s unprecedented currency crisis in 1997-1998 is partly attributable to the weakening of the yen.
It may be a myth that a weaker yen would deal deadly damage to the Korean economy. For the past decades, Korea’s export structure has changed. Local companies have accumulated non-price competitiveness such as technology and quality. Many Korean exporters have increased the manufacturing of products outside Korea.
Local borrowers of yen-denominated loans have to strengthen currency exposure management. Korea will see a reduction of Japanese tourists as the local currency strengthens against the yen. Importers of Japanese products will benefit from the weaker yen.
The looming end of the super, super-strong yen era is another burden to the Korean economy already struggling with low growth, high inflation and expensive oil prices.