ed Korea needs to combat weak yen

By Lee Chang-sup

The Korean economy has undergone three booms and busts over the past 29 years, during which the Japanese yen has played a critical role. Past data shows that without exception, a strong yen powered the Korean economy while a weak yen dampened it.

The yen has been weakening for the past two years. It fell to a six-year low against the won, being traded at 9.63 won as of Monday, compared with 14.88 won in January 2012. The weakening yen could cause a gradual downturn of the Korean economy unless appropriate measures are taken.

The yen is expected to lose further against the won as long as Japanese Prime Minister Shinzo Abe is in office. According to London-based magazine The Banker, eight of the world’s top 30 banks including Citi and JPMorgan Chase predicted that should the yen continue to weaken, it would be traded at the 8-8.5 won range by the third quarter of next year.

Korea’s booms and busts have coincided with the yen’s strength or weakness. From 1985 to 1988, a strong yen powered the South Korean economy, doubling exports and pulling the Korean stock price index, KOSPI, above 1,000 points. However, according to the Bank of Korea, when the yen weakened in 1989, exports fell from 28.4 percent in 1988 to just 2.8 percent.

Similarly, in the mid-1990s, a strong yen fueled the national economy and its property and stock markets again. In contrast, the Korean economy experienced its worst crisis in 1997 when the yen started to weaken again. Unable to close the gap between imports and exports, Korea had to seek a bailout from the IMF and the World Bank in late 1997.

The yen remained strong from the early 2000s until two years ago when Abe adopted a weaker yen policy. Since then, the yen has weakened by 35.8 percent.

The Korean economy is closely tied to the yen’s strength or weakness because Korea and Japan manufacture many of the same products. According to the Federation of Korean Industries — a chabeol lobby group, 55 of Korea’s top 100 manufactured products, including cars, ships and electronic products, are competing worldwide with their counterparts from Japanese brands. While both Korean and Japanese products have more or less the same excellent quality, Japanese products have an advantage in terms of price, it said.

Sookmyung Women’s University economics professor Shin Se-don predicted that because of the lower-priced Japanese goods, Korean imports will exceed exports in two years; specifically, he forecast that annual exports would fall by up to $50 billion, about 10 percent of the total exports. He warned that the resulting current account deficit could trigger a currency crisis like the one the country faced in 1997. Indeed, data shows that the Korean economy will inevitably face a crisis in two years after the yen loses 30 percent of its value against the Korean currency.

Although many South Korean economists share Shin’s sentiment, Wall Street stock analyst Henry Seggerman does not. Seggerman, who has been monitoring the Korean stock market and the economy for the past two decades, said the current market jitter is exaggerated. He said, “Korea and Japan for decades have competed in steel, shipbuilding, motorcars, semiconductors, and display. So, one might expect market jitters to accompany a weakening yen.” He also said, however, “The yen bottomed at 7.44 won in July 2007, and Monday’s 9.63 is still far above that,” and “The yen began its latest fall in May 2012, and since that time, the KOSPI has risen 13 percent. The weakening yen has not kept the Korean market from rising.”

He added, “Today, a much larger part of overall mutual exports are quality-driven, rather than commoditized. Japan has fallen behind Korea in steel and shipbuilding, with China a much bigger factor today. Japan’s interest in semiconductors and display is waning.” He also said Korean cars continue to gain ground on Japanese cars. “Another important factor is that both Japanese and Korean exporters have to import raw materials and parts, which tends to offset the effect of currency volatility up and down.”

While the Bank of Korea could do what the Bank of Japan has done, including cut its key rate, expand its money supply and intervene heavily in the foreign exchange market, it should realize that such a “dirty float” or “beggar-thy-neighbor” policy would negatively affect other countries the way the weak yen is affecting Korea now. In addition, a weak currency is not always good because it benefits exporters at the expense of consumers, hikes inflation and slows corporate restructuring.

Korea has a few policy tools that it can consider to combat the weakening yen. It could adopt a policy mix of encouraging capital outflow to offset surging capital inflow, urging Japan to stop manipulating its currency and encouraging companies to upgrade product quality through restructuring. Such an approach will help the country overcome the cheap yen, strengthen the economy and local companies and benefit consumers.

Lee Chang-sup is The Korea Times editor-in-chief and vice president. Contact him at editorial@ktimes.co.kr.