[Han-Jung-Il Economic Turbulence]④ Expectation of Change in Japanese Monetary Policy After April... Lee Chang-yong "Dollar Also a Variable"

Possibility of Japan Shifting to 'Ultra-Low Interest Rate Policy' This Year
Positive News for Korean Exporters Competing with Japan
Lee Chang-yong: "Japan's Policy Shift Depends on Dollar Flow"

The era of 'Enjo' (weak yen) is coming to an end. Although the Bank of Japan decided on the 18th to maintain its existing monetary easing policy, the market expects a sudden policy shift around the retirement of Governor Haruhiko Kuroda in April. As the world's third-largest economy, Japan's monetary policy shift is expected to have a significant impact not only on Northeast Asia but also on global markets. In particular, South Korea, which has a high degree of export competition with Japan and is economically closely connected, is bound to experience greater ripple effects. Experts explain that while a rise in the yen's value due to Japan's policy shift could immediately improve the export competitiveness of Korean companies, side effects such as an increase in the trade deficit with Japan are also expected, so close attention is necessary.

Ultra-low interest rates maintained... but policy shift likely

Japan's ultra-low interest rate policy, introduced during former Prime Minister Shinzo Abe's administration in 2013, began with the intention of "reviving the economy through money." At that time, the Bank of Japan and the government jointly announced that they would implement large-scale monetary easing and ultra-low interest rate policies to escape deflation (long-term price decline) that had persisted since the 1990s and stimulate the economy. Since then, Japan has lowered short-term interest rates to -0.1% and guided the 10-year government bond yield, a long-term interest rate indicator, to around 0%.

At the monetary policy meeting held yesterday, the Bank of Japan decided to maintain this policy as is. In the previous meeting, the Bank of Japan effectively raised interest rates by maintaining the 10-year government bond yield at 0% but widening the allowable fluctuation range from '±0.25%' to '±0.5%,' so there was interest in possible policy changes this time as well, but there was no 'surprise.' However, the market accepts the Bank of Japan's future policy shift as a given. Despite the sharp interest rate hikes in the United States, Japan has maintained 'solo low interest rates,' but it is becoming increasingly difficult to bear the side effects of ultra-low interest rates.

The 'rollercoaster' yen is also a problem. The yen, which was around 115 yen per dollar in early January last year, fell to 150 yen, the lowest level in 32 years, in October of the same year. The Japanese government reportedly spent more than 9 trillion yen between September and October to defend the exchange rate. Recently, the yen-dollar exchange rate has fallen below 130 yen, but it is still high compared to before. Over one year, the yen's value against the dollar dropped by 12.43%, a much larger depreciation than the Korean won (-4.37%), euro (-5.33%), pound (-9.21%), and yuan (-6.31%).

Possibility of 'surprise monetary easing' in March

It is highly likely that the Bank of Japan will make a full-scale policy change after Governor Haruhiko Kuroda retires in April. Global investment banks such as Goldman Sachs (GS), Citi, and JP Morgan expect that the Bank of Japan will begin normalizing monetary policy this year, starting with the yield curve control (YCC) policy change at the end of last year. The burden on Japanese financial institutions has increased due to the decade-long low interest rates, and combined with recent corporate difficulties caused by increased exchange rate volatility and turmoil in the government bond market, it is practically impossible to continue 'Abenomics.'

Although there are opinions that it is not easy for the Bank of Japan to immediately shift its policy stance because Japan's inflation rate is expected to fall short of the target this year, there is no disagreement that Japan will gradually proceed with the abolition of the YCC policy. The Bank of Korea also explained this year that "additional policy adjustments are necessary to reduce side effects such as yield curve distortion caused by the long-term implementation of the YCC policy," and "there are signs of political momentum changes, including the possibility of revising the joint statement between the government and the Bank of Japan, which is the basis of the accommodative monetary policy stance."

Lee Ji-pyeong, a special professor at the Department of Convergent Japanese Area Studies at Hankuk University of Foreign Studies, said, "Governor Kuroda has a style of not wanting to follow market predictions," adding, "Just as he shocked the market with a sudden policy change in December, he may ease policies in March before his retirement, or since the pace of U.S. rate hikes has slowed, he may take a more relaxed approach after the governor changes."

'Strong yen' helps Korean exports

If the Bank of Japan's ultra-loose monetary policy ends and the yen's value rises, it will be positive for the Korean economy. Last year, while the dollar sharply rose, the yen showed a 'record-level' weakness, which was a burden for Korean companies. When the yen depreciates, Japanese export products gain price competitiveness, which burdens Korean companies competing with Japan in the global market. According to data released by the Korea Economic Research Institute at the end of last year, a 1 percentage point increase in the yen-dollar exchange rate growth rate results in a 0.61 percentage point decrease in Korea's export growth rate.

In the early stages of a strong yen, domestic industries with high export competition with Japan, such as automobiles, steel, and home appliances, are expected to benefit. In the past, during periods of yen strength in 2010 and 2016, it also positively affected Korean exports, raising expectations for economic recovery. In particular, a strong yen also helps improve Korea's travel balance. Last year, the yen's sharp decline increased demand for travel to Japan, widening the deficit, but if the yen rebounds, it is expected to ease the pressure on Korea's tourism industry and travel balance.

However, if the prices of items imported from Japan rise due to a strong yen, it could negatively affect the trade balance with Japan. Korea imports a significant portion of key materials and components for major exports such as semiconductors from Japan and suffers from a chronic trade deficit every year. Professor Lee said, "Although the increase in import costs may be somewhat burdensome, if it also helps exports, it will be manageable," adding, "A strong yen has always been a positive factor for our industry."

Lee Chang-yong, Governor of the Bank of Korea, said at a press briefing with the Seoul Foreign Correspondents' Club yesterday, "The Japanese government's decision is important, but the pressure on Japan's YCC policy will also depend on how the dollar's strength changes." He added, "There is interest from many countries in how the increase in Japanese interest rates will affect the inflow of Japanese funds that had gone overseas, but I believe that due to the large interest rate gap, the impact on capital outflow will be limited for the time being."

Kuroda Haruhiko, Governor of the Bank of Japan, is attending the Monetary Policy Meeting held at the Bank of Japan headquarters in Tokyo on the 18th. [Image source=Yonhap News]