Weaker Yen No Welcome Sight to Korea, Global Corporations

Economists and officials in South Korea are concerned about the yen because the nation is an export-driven economy similar to Japan.
Weaker Yen No Welcome Sight to Korea, Global Corporations
A worker assembles a Hyundai vehicle at the Asan plant on in Asan, South Korea in this file photo from 2006. Currently, economists and officials in South Korea are concerned about the yen because the nation is an export-driven economy similar to Japan.(Chung Sung-Jun/Getty Images)
3/26/2013
Updated:
4/3/2013

NEWS ANALYSIS

Japanese Prime Minister Shinzo Abe’s new monetary policy to combat deflation and jumpstart Japan’s long-stagnant economy has been a boon to Japanese corporations relying on exports—the yen has declined more or less around 10 percent against the dollar, the euro, and the Korean won in the last three months.

But for nearby South Korea, and a slew of foreign multinational corporations, the weakening yen has become a large hindrance.

The Bank of Korea said this week in Seoul that the nation’s 2012 fourth quarter GDP increased 1.5 percent compared to the same quarter a year ago, and only 0.3 percent compared to the third quarter.

Economists and officials in South Korea are concerned about the yen because the nation is an export-driven economy similar to Japan. Korean corporations, especially automakers and electronics manufacturers, compete in the global market with Japanese companies. A strong Korean won—it has appreciated noticeably against the yen—is detrimental to Korean exporters.

“Japan’s expansionary policies are having various ripple effects on many countries. The yen is depreciating while the won is gaining and this is flashing a red light for Korea’s exports,” Korean Finance Minister Hyun Oh Seok told reporters on March 23.

At the G-20 summit in Moscow last month, finance ministers and central bank heads from 19 of the world’s most industrialized nations plus the EU agreed not to manipulate exchange rates for competition purposes, while not mentioning Japan explicitly. Korea has indicated that it would raise the issue with the G-20.

 

Multinationals Concerned

The sliding yen has also affected business at global multinational corporations, putting Japanese exporters at an advantage. Focus Taiwan TV reported that Japan’s Mazda has lowered prices in Taiwan, and it has enacted a similar price slash in Canada. Electronics makers such as Panasonic and Toshiba could employ similar strategies.

A weak yen produces two results for Japanese exporters. Products made in Japan will appear cheaper to overseas consumers, boosting sales. The other benefit is that sales and revenues created overseas will be worth more in yen after currency translation for companies headquartered in Japan and those which report their earnings in yen.

For non-Japanese companies competing in the global marketplace, this presents a challenge. Korean automaker Hyundai reported that its Feb. sales dropped 19 percent compared to the prior year, which can be partially attributable to far smaller declines at Japanese firms Honda and Nissan.

American automakers also felt the pain. Matt Blunt, President of the American Automotive Policy Council, said: “We urge the Obama Administration to make it clear to Japan that such policies are unacceptable and will be met by reciprocal measures,” according to a statement in January, shortly after the yen declined 10 percent against the dollar in a small period of time.

Japan’s argument? Its commitment to buy government bonds is not an unheard of tactic to undertake by a central bank. The Federal Reserve has also embarked upon similar measures, such as the recent rounds of quantitative easing (QE), to produce its desired effects. The QE has injected more cash into the financial markets and has prevented dollar appreciation.

 

Tables Have Turned

According to a Bloomberg report, Deputy Economy Minister Yasutoshi Nishimura defended Japan’s monetary policy by saying, “While the yen is traded completely openly, there may be intervention on the won and the country has fixed regulations on foreign investments.” Japan’s view is that the yen’s decline is merely a byproduct of other economic stimulus measures aimed at combating deflation.

The irony of all the rhetoric is that the opposite situation had been playing out in East Asia over the last decade, as a strong yen had pushed numerous Japanese multinationals into the red for years, while Korean manufacturers such as Hyundai, Samsung, and LG have grown to become dominant players in their respective industries.

While Samsung has been among the most cutting-edge electronics manufacturers—far more so than most Japanese rivals—since 2008, the won has lost more than 50 percent of its value against the yen, no doubt a factor in the meteoric rise of Samsung over the last few years. 

But Korean exporters should fear not, as South Korean officials seem genuinely committed to keep the won from appreciating. Eun Sung-soo, director general at the Korean finance ministry, hinted that some forms of financial transaction taxes may be in order, according to a Financial Times report this week, which served to push the won lower against the dollar. 

One of the potential ideas floated was the so-called “Tobin tax,” named after Nobel Laureate James Tobin, who proposed in 1972 a tax on all inter-currency transactions. Such taxes, if implemented, could stabilize currency volatility and limit money inflows due to monetary easing introduced by foreign central banks.

Another reprieve? There’s always the threat of war from North Korea. The won has depreciated in recent weeks since North Korea ramped up its threats of a new war on the Korean peninsula.