Korea-Japan currency feud deepening

BOK freezes key rate for 3rd month

By Kim Jae-kyoung

The currency feud between Seoul and Tokyo is showing signs of deepening as the nation’s top banker has expressed dissatisfaction with Japan’s finance minister for criticizing Korea’s foreign exchange policy.

At a meeting with reporters Thursday following October’s Monetary Policy Committee meeting, Bank of Korea (BOK) Governor Kim Choong-soo said, “It is not desirable for one country to make comments on another country’s foreign exchange rates.”

His remarks came a day after Japanese Finance Minister Yoshihiko Noda criticized the Korean government for frequent market intervention to curb the won’s rise, calling into question Korea’s leadership of the G20 summit.

The central bank said that Kim’s comments were not targeting the Japanese minister but market participants believe that they were aimed at sending a warning to Japan.

On the same day, the BOK kept its key interest rate frozen at 2.25 percent for the third consecutive month on growing concerns over the slowing global economy and rapid rise of the Korean won against the dollar.

“The pace of the recovery in the U.S. economy has slowed somewhat. Looking ahead, there exists the possibility of heightened volatility of economic activity and exchange rates in major countries acting as a risk factor for the global economy,” Kim told reporters.

“Currency frictions (between major countries) are an increasing downside risk for the economy. External conditions are really important for a county like Korea with a heavy dependence on external demand,” he added.

Widening rate differentials with other countries sparks more foreign capital inflows in search of higher returns and gives strength to the currency. The won has sharply gained ground on the dollar amid major economies’ attempts to devalue their currencies. The won closed at 1,110.9 won Thursday, up 9.8 won from Wednesday.

Kim also remained cautious about inflation risks. “Consumer price inflation has increased due to a sudden rise in farm product prices, and in the future, upward pressures on the demand side are expected to continue, being associated with the continued upswing in activity,” he added.

Rate hike may come in December

Market analysts said that a rate hike is expected to come later rather than sooner as inflation risks are not great at the moment.

“I think inflation pressure is benign enough that the BOK doesn’t need to rush to normalize it. I don’t expect inflation to accelerate due to the BOK’s failure to raise the interest rate today,” ING Group senior economist Tim Condon told The Korea Times..

“I expect the BOK will hike the rate after the G20 meeting, with a 25 basis point increase in December. We think 3.75 percent is normal for the policy rate and we think the BOK will get there in the third quarter of 2011,” he added.

With the rate freeze, yields on three-year treasury bonds fell by 0.2 percentage points to 3.08 percent Thursday, the lowest level in history.

The benchmark KOSPI jumped by 23.61 points, or 1.26 percent, to close at 1,899.76 from the previous close on the back of foreign investors’ strong buying.