Weak yen dims Korea's economic prospects

Concerns are mounting over the potential negative impact of prolonged weakening of the Japanese yen on Korean exports which were expected to bolster the Korean economy in the second half of this year.

The yen-dollar rate closed at 150.39 yen on Thursday (local time) in the foreign exchange market. This marks the yen's lowest level since its depreciation began last October. Since the end of January, the yen-to-dollar exchange rate has risen by over 13 percent. This increase is noteworthy, particularly when compared to the 8.8 percent growth in the won-to-dollar rate over the same period.

The yen's decline can be attributed to Japanese assets flowing into the U.S. in search of higher returns. This comes as Japan pursues monetary easing to combat stagnant growth, while the U.S. takes a more hawkish stance on policy rates.

However, the depreciation of the yen poses a challenge to Korean industries like automobiles and steel, which face strong export competition with Japan. When both nations offer similar products on the global market, a weaker yen can give Japanese products a pricing edge. According to the Korea Economic Research Institute, a 1 percent depreciation of the yen against the dollar results in a 0.2 percent drop in Korea's export volume and a 0.61 percent decline in its export value.

This casts a shadow over the Korean government's hopes for an economic rebound in the latter half of this year.

"The fourth quarter of 2023 could serve as an inflection point in the long-term," the Korea International Trade Association noted in its analysis on Thursday, emphasizing that the potential for a substantial upswing in export growth is still uncertain.

Conversely, the Japanese economy is benefitting from the yen's depreciation, capitalizing on rising exports and tourism.

On Oct. 10, the International Monetary Fund (IMF) projected Japan's economic growth at 2 percent for this year, marking a 0.6 percent increase from its July forecast. It, however, maintained Korea's growth prediction at 1.4 percent for the second consecutive time. Should this trend persist, Korea's economic growth rate would lag behind that of Japan's for the first time in 25 years, since the Asian financial crisis.

Individual investors, who had anticipated a strengthening yen within this year, are becoming apprehensive due to the potential for financial damage.

Data from the Korea Exchange reveals that individual investors acquired 13.7 billion won ($10.08 million) worth of Mirae Asset Tiger JPY KRW Futures ETF ― a sole ETF in Korea that bets on the yen's recovery ― from July 31 to Sunday. However, the ETF recorded a 0.23 percent decline since August and saw a 5.91 percent drop this year.

Nevertheless, market watchers expect the Bank of Japan (BOJ) to reverse course by the end of this year.

"The rising U.S. Treasury yields, leading to a greater divergence between U.S. and Japanese interest rates, amplify pressures on yen depreciation, potentially resulting in increased import prices. As such, sustaining the easing policies for a prolonged duration becomes challenging," said Shin Earl, an analyst at Sangsangin Investment & Securities.