In the wake of a landslide election victory by Japan’s Liberal Democratic Party (LDP), the specter of the yen’s rapid devaluation looms large, dealing a blow to the already-moribund global economy.
The local currency closed at 1,072.5 won against the dollar Monday, up 2.1 won from Friday’s close, apparently affected by the prospect of the weakening of the Japanese currency.
Japan’s Prime Minister-in-waiting Shinzo Abe said Monday that once he formed his cabinet on Dec. 26, he would push ahead with a 2-percent inflation target, double the current goal. This means that Abe will conduct ``unlimited’’ monetary easing by the Bank of Japan, as he pledged during his campaign.
The consequences could be disastrous, as countries around the world will engage in competitive devaluation, which would darken prospects for an early economic recovery.
In fact, the yen weakened in Asian trade Tuesday as markets looked to a BOJ meeting for signs of more easing. The dollar bought 83.94 yen, up from 83.97 yen in New York, Monday. This represents a 7-percent devaluation of the yen, compared with 78 yen two months ago. The won-yen exchange rate was quoted at 1,275 won per 100 yen Monday, compared with 1,500 won at the beginning of this year.
The yen’s fall is a fresh concern for Korean companies that have already been reeling from massive monetary easing by the United States and the European Union. Seoul’s recent upgrading of sovereign ratings has also prompted persistent foreign fund inflows to the detriment of the country’s export competitiveness.
Given that the export break-even point for local small- and medium-sized companies is around 1,102 won per dollar, we presume that many of them have already reached a point where they reap profits no longer.
However, there is an argument that the impact of the yen’s devaluation is not that big. In particular, Korea’s export of motor vehicles, which fiercely competes against their Japanese counterparts abroad, will go unscathed because the percentage of overseas production has already surpassed 50 percent. Speculation has it that Seoul is above Tokyo as far as information technology (IT) products are concerned.
It’s questionable that the so-called Abenomics, Abe’s economic policies characterized by unlimited monetary easing, minus interest rates and the higher inflation target, would lead Japan out of the two-decade slump. More than anything else, such moves from Japan may prompt the U.S., which has heaved a sigh of relief over budding signs of recovery, to go to a currency war.
Considering that Japan must issue state bonds massively to finance Abenomics, the island country’s capabilities are in doubt. This is all the more so, given that the ratio of Japan’s national debt to gross domestic product reached 237 percent.
The latest situation doesn’t warrant complacency on the part of our financial policymakers. To reduce the currency volatility, Seoul is currently imposing tax on foreigners’ bond trade and regulation on forward exchange position. But these measures do not appear to be sufficient. The policymakers need to consider further interest rate cuts, if necessary, to keep abreast of the worldwide rate cut drive.