By Yoon Ja-young
The won’s gain against the Japanese yen is accelerating, igniting concerns about the negative impact this could have on exports.
On Thursday the Japanese currency reached its weakest point in six years, trading at 109.2 yen per dollar.
With Japan’s Abenomics losing steam, it seems likely that the central bank will continue quantitative easing, which stands to weaken the Japanese currency further. Japan’s economy contracted 7.1 percent in the second quarter, as the damage to the economy was greater than expected following the consumption tax hike in April.
In contrast, the U.S. Federal Reserve is widely expected to start tapering soon. Stable economic growth and falling unemployment are fueling speculation that the central bank will raise the key interest rate in the middle of next year.
All these factors are strengthening the dollar, and some say the yen may fall to more than 140 yen per greenback.
Unlike the yen, the Korean won is strengthening against the dollar due to a current account surplus and foreign investors buying Korean stocks.
The weak yen and strong won are already hurting Korea’s exporters.
Hyundai Motors held only 7.9 percent of the U.S. market last month, a decline of 0.4 percentage point, as Japanese competitors such as Toyota and Nissan benefited from the weak yen.
Korea’s export growth rate has remained below 3 percent since 2012, a steep fall from the average 15 percent growth it had enjoyed during the previous few years.
“The export similarity index is increasing between Korea and Japan…Korea may lose price competitiveness against Japan in its main export items such as computers, precise equipment and communications equipment,” said Byun Yang-gyu, director of macroeconomic policy research at the Korea Economic Research Institute. He added that exporters were suffering lower profitability, as foreign exchange rates fell below their break-even point.
Some economists suggest that Korea’s central bank should consider further cutting the key rate.
Prof. Kang Sam-mo at Dongguk University, meanwhile, said “the country should try to boost domestic consumption to curtail the excessive trade surplus, which is causing the Korean won to get stronger.”
Asia Finance Society President Oh Jung-geun points out that both of the two most recent crises in Korea involved a weak yen and a U.S. interest rate hike.
“The U.S. Fed raised the key rate by 300 basis points for 14 months beginning in 1994, and that made the Korean won gain 30 percent against the yen between April 1995 and February 1997. As a result, Korea’s current account deficit expanded to $23 billion in 1996, depleting its foreign exchange reserves and causing the foreign exchange crisis of 1997,” Oh said.
He added that the won gained 47 percent against the yen between 2004 and 2007, when the U.S. Fed raised its key rate by 425 basis points.
“Korea’s current account turned to deficit in 2008, leaving the country with a foreign exchange liquidity problem after the collapse of the Lehman Brothers,” he said.
He expressed concern that the won has gained 56 percent against the yen since June 2012, while the United States is expected to raise its key rate next year.