Quake fuels Korea’s economic woes
By Kim Tong-hyung
A week into Japan’s earthquake, tsunami and nuclear crises, the economic effects are starting to be felt more widely across the world. The sentiment here appears to be as precarious as the walls of Fukushima Dai-Ichi.
The best that can be said is that, at least for the moment, the financial markets seem to have regained their cool. After swinging wildly between highs and lows, the Korea Composite Stock Price Index (KOSPI) closed last week at a near pre-quake level of 1,981.13, with investors beginning to separate facts from fiction in the apocalyptic news reports.
The anxiety created by the sharp post-quake appreciation of the Japanese currency, which had won-dollar rates fluctuating here, was tamed with the Bank of Japan continuing to flood the market with liquidity and the Group of Seven nations displaying their commitment to ease the upward pressure on the yen.
But the limited samples of share prices and currency reactions aren’t enough for most analysts to declare that the Korean economy is back to normal. And how good can ``normal’’ be, when prior to Japan’s tragedy, higher prices and a slow economy had petrified policymakers debating whether stagflation was at the doorstep?
Since the start of the year, political unrest in the Middle East and North Africa has driven what has become an inexorable rise in the prices of oil and other global commodities, which have been threatening to derail an already fragile recovery across advanced nations.
The situation in Japan seems to be aggravating things, adding to the woes of Korean government officials who are being kicked in the teeth by critics for their supposed ineptitude in crafting anti-inflation policies.
According to officials here, the Commodity Research Bureau commodity price index rose to 351.15 last Friday and has grown by 5.5 percent since the start of the year. Oil prices have settled in the triple digits and the prices of food and metals have been advancing as well.
``Consumer prices have been rising fast since the start of the year, and the Japanese earthquake assures that the prices of fuel and other commodities won’t be tamed any time soon. Considering that the country is maintaining interest rates at a lower than neutral level, the price pressure will continue to take hold,’’ said Lee Ji-pyeong, a researcher at the LG Economic Research Institute.
The Lee Myung-bak administration, which had insisted on putting growth before price stability, is struggling to deal with higher prices coupled with subdued economic activity.
Consumer prices rose 4.5 percent in February from a year ago, significantly faster than the government’s 3 percent target, while producer prices jumped 6.6 percent, the fastest pace in 27 months. The rising inflationary pressures force the Bank of Korea to raise interest rates by a quarter of a percentage point to 3 percent earlier this month.
It’s too early to assess the economic cost of the Japanese tragedy as the country scrambles to prevent the natural disaster from turning into a nuclear one. Most observers will say that the blow to economic activity will be temporary. However, it’s obvious that the short-term consequences will be severe, and the smaller members of Korea Inc. are already feeling them.
Small-and-medium firms sold $10.5 billion worth of goods to Japan last year, accounting for around one third of Korean exports to the country. The Korea Federation of Small and Medium Businesses says that the impact of the earthquake has been significant for smaller firms, as companies of less than 100 employees make up for more than 80 percent of the 240 or more damage reports it has received so far.
Big businesses are also feeling blue as well. Many Japanese producers have suspended operations at their plants since the earthquake, and this has Korean firms in automotives, technology and steel concerned over disruptions in parts supply.
Perhaps, the intangible effects of the Japanese crisis matter just as much as the tangible. Prior to the earthquake and tsunami, the Korean real-estate market had been showing signs of life after taking a drubbing in past years. But now, with the confidence of investors crippled, property transactions in Seoul and the nearby metropolitan cities have evaporated again, according to market watchers here.
``War, financial crisis, natural disasters affect not only stock markets but the sentiment among real-estate investors too. It wouldn’t have mattered so much if the market was in a strong and stable state, but of course, that wasn’t the case,’’ said a researcher from property market analysis firm, Speed Bank.