By Kim Tae-gyu
Staff Reporter
Another time bomb is ticking in the already fragile local economy ― the Japanese yen is appreciating steeply against the Korean won as well as other currencies.
The yen continues to renew record highs against the Korean won. The won closed at 1,546.09 won against 100 yen Monday and the figure briefly touched 1,600 won Tuesday.
Considering the exchange rate was around 800 won per 100 yen last October, the value of the yen has doubled over one year.
Experts point out that the super-strong yen will have two negative effects on the domestic economy ― higher import prices and indirect effects of the weakened Japanese economy.
``First of all, importers of Japanese products will have to pay twice as much. As many of our manufacturers heavily rely on Japanese components, that causes concern,'' said Kim Kyung-mo, an analyst at Mirae Asset.
``In addition, the strong yen will weigh on the Japanese economy. We will be affected in various ways if the neighboring nation suffers from slowdown,'' he said.
Citigroup economist Oh Suk-tae said several reasons are behind the strong yen including the yen carry trade and people's quest for safer assets.
``Now the yen is regarded as a barometer to measure people's attitude against risk. If they are risk-averse, the yen appreciates and vice versa,'' Oh said.
``The rising yen means people currently want to avoid risks in the midst of a global financial storm. Together with the yen carry trade, this racks up the yen,'' he said.
The yen carry trade refers to an easy-money play involving the interest rate gaps between the ultra-low Japanese yen and other high-yield assets in other places.
Over the past decade, the Bank of Japan has maintained very low interest rates, sometimes equivalent to zero, to prop up the economy that has been suffering a downward spiral.
Foreign banks or institutions borrowed money in yen and invested in bonds or other risky assets worldwide, mainly in emerging countries, to exploit gains from the difference.
This strategy paid off borrowers handsomely when interest rates were substantially higher outside Japan and the foreign exchange rates remained stable.
But as central banks of other countries cut interest rates, the yen started losing its attractiveness. So borrowers want to sell the yen.
The No. 1 sentiment for security in the midst of the financial storm has exacerbated the situation. Panicked investors want to retain the yen, the currency of the world's second-largest economy, alongside the dollar.
As the demand for the yen surges, the Japanese currency appreciates.
``The yen will depreciate when people are ready to take more risks. This will happen when the economy gets back to normal. In this climate, it is hard to predict when the yen will go down,'' Oh said.