The Korean won has continued to slide against the Japanese currency since the fourth quarter of last year. The yen has recently gained further as investors seek safe assets after “Brexit” worries led to a plunge in the value of the British pound.
The Japanese currency is hovering over 1,105 won per 100 yen, which is its strongest position since September 2013. The situation has reversed from just several months ago, when the yen was weak against the won because of Japan’s quantitative-easing measures to supply liquidity to the market. The exchange rate stayed between 890 and 930 won in the first half of 2015.
Some government officials and exporters might welcome the cheaper won compared to the yen, as well as to the U.S. dollar. The won’s depreciation against the two reserve currencies could be beneficial to Korea in terms of export price competiveness. Furthermore, the yen has strengthened against the U.S. dollar.
However, there is a significant factor which should not be glossed over: Korea is highly dependent upon Japan in its importation of capital goods and manufacturing components, which are prerequisites to rolling out finished products. High import prices could ultimately be a bane to local exporters that have to purchase intermediate goods from Japan during the assembly process.
The situation could deal a more critical blow to small and midsized enterprises, which have no ability to produce their own components or equipment.
The cheap won could also bring woes in terms of inviting a spike in import prices of raw materials from a variety of countries. In the financial market, there is a possibility that Japanese investors will pull out of their investments in Korean equities if they judge the yen will strengthen at least in the coming months.
Korea’s stock market has already been saddled with concerns of capital outflow stemming from the U.S. monetary policymakers’ hawkish stance on raising interest rates. To make matters worse, a certain portion of investment from the Middle East has recently been withdrawn amid oil producers’ worsening liquidity on low crude prices.
The sliding won is also undesirable in terms of citizens’ purchasing power. High import prices would build inflationary pressure and hamper a robust recovery in domestic demand, while the Bank of Korea — on the contrary — raises the possibility of deflation.
Should Japanese policymakers choose to retrieve money from the market as a form of monetary tightening, the yen could shoot up further. Japan has no choice but to raise its benchmark rate again as its negative rate policy is creating a variety of side effects.
The yen’s sharp gains could certainly be an extraordinary, temporary phenomenon reflecting the possible departure of the U.K. from the European Union.
A solution to curb the strong yen against major currencies could be sought at the Group of 20 finance ministers meeting in Shanghai, slated for Feb. 26-27. While participants are poised to seek policy coordination, Japan — in fear of an export slump — may be most active in proposing restraint from currency devaluation.
