Yen's prolonged weakness feared to disrupt Korea's growth

Experts warn adverse effect of Japanese currency's depreciation could spread to Seoul's current account balance

By Yi Whan-woo

A persistently weak Japanese yen is showing no signs of a rebound, raising concerns that it can adversely affect not only exports, but also current the account balance as well as other broader aspects of the Korean economy.

Analysts say the yen's prolonged weakness can add downward pressure on Korea's 2023 growth, which has already been revised down to 1.4 percent from 1.6 percent by both the Ministry of Economy and Finance and the Bank of Korea (BOK).

They said such downward pressure can eventually hamper Korea's recovery efforts in the second half of the year.

“Although not as toxic as in the past, the weak yen has been hurting Korea's exports and that damage can spread to the current account balance as time goes on,” said Lee Sang-ho, head of the economic policy team at the Korea Economic Research Institute (KERI). “I'd say a weak yen can even threaten our government's push to spur the economy in the latter half following the sluggish economy in the previous half.”

The KERI researcher noted the country's outbound shipments fell for the ninth consecutive month from a year earlier in June, although the pace of the decline marked a yearly low of 6 percent.

Exports this year amounted to $320.4 billion as of July 10, down 12.5 percent from last year.

The 2023 trade deficit has amounted to $28.7 billion so far. In June, the trade balance snapped its losing streak for the first time in 16 months and turned to black, but this was attributed mainly to a fall in energy imports.

Of the export fall in the first half of 2023, the weak yen was responsible for $100 billion of the total decline, according to Lee.

With regard to the dollar in the first six months of the year, the value of the Korean won retreated 5.1 percent while that of the yen slid 9.8 percent.

“Such a difference in the value of the Korean and Japanese currencies against the dollar apparently makes Korean export items less competitive than the Japanese goods,” Lee said.

Concerning the won-yen exchange rate, it was considered virtually a norm for years that 100 yen be traded at 1,000 won or slightly higher.

But the yen retreated and has been staying mainly in the level of 900 won per 100 yen since last year. It even slid to as low as 897.49 won on June 19, marking the lowest level in eight years.

Asked when the Japanese currency will bounce back, Hana Institute of Finance researcher Kim Ji-hoon said it will depend on the U.S. Federal Reserve's monetary policy.

He said a weakened yen is related to the Fed's aggressive rate hike campaign and that it will persist throughout the remainder of 2023.

“The Fed hinted at additional hikes for the rest of the year although it paused its more-than-year-long rate hike campaign in June,” Kim said.

Under the circumstances, Korean tourists are capitalizing on the yen's depreciation and rushing to travel to Japan at much cheaper prices.

Some 2.58 million Koreans visited Japan between January and May, accounting for 29.9 percent of total inbound travelers to Japan, according to the Japan National Tourism Organization.

The number is comparable to a total of 665,611 Japanese visitors to Korea over the same time period.

Accordingly, the travel deficit reached $3.24 billion in the first quarter of the year, marking the highest since the third quarter of 2019 when it reached $3.28 billion, according to the BOK data.

While the current account balance swung from a $790 million deficit in April and returned to black in May, the KERI researcher warned that this surplus may not last if the travel deficit worsens and subsequently hurts the service account balance.

The intensity in Korea's competition against Japan on export-focused manufacturing items has eased over the years as many Korean manufacturers moved their operations overseas.

Nevertheless, the level of export similarity still remains high and “the damage on exporters will become unbearable if a weak yen lasts indefinitely,” according to Joo Won, deputy director of Hyundai Research Institute.

He noted that the export similarity against Japan was measured at 69.2 in a recent study, higher than 68.5 against the U.S., 60.3 against Germany and 56 against China.

“The competition is especially severe for cars, which top the list of exports, meaning the export slump can get worse if the depreciation of the yen goes on,” Joo said.

Cars were behind minimizing the export decline in June, as their exports increased 58.3 percent to extend 12 months of gains, as compared to outbound shipments of semiconductors that shrank 28 percent.

In the first 10 days of July, car exports advanced gained 25.2 percent to $1.44 billion, while those of semiconductors went down 36.8 percent to $1.82 billion.

“A weak yen may not disrupt the Korean economy from growing 1.6 percent this year as projected by the government, but it can have an adverse effect next year,” Joo said.