[Why&Next] Falling Yen, Rising Won... Impact on Korea's 'Exports and Growth'

KRW Strengthens Against Dollar, Yen Weakens
Won-Yen Exchange Rate Drops Sharply to 860 Won Range
Severe Yen Weakness Hits Japanese Exporters
Toyota Stock Soars, Hyundai Motor Pauses
Japan Struggles to Defend Yen Amid US Pressure

Recently, as the value of the Japanese yen has significantly dropped against the Korean won, attention is focused on the potential impact of the weak yen phenomenon on the South Korean economy. Given that the export competition between South Korea and Japan has weakened compared to the past, the damage to Korean export companies caused by the weak yen is not expected to be substantial. However, among experts, there are concerns that if the weak yen phenomenon continues until next year due to internal and external circumstances in Japan, it could negatively affect certain export items and the travel balance.

According to the foreign exchange market on the 9th, while the Korean won has shown strength against the US dollar this month, the yen has been weakening significantly. As of 9 a.m. that day, the won has depreciated by only 3.60% against the dollar this year, whereas the yen has plunged by 13.02%. Looking since last September, the won has appreciated by 0.54%, but the yen has fallen by 3.13%, continuing its downward trend. The yen-dollar exchange rate is soaring, attempting to stabilize at the psychological threshold of 150 yen.

Accordingly, the won-yen exchange rate has also been steadily declining this year. According to the Bank of Korea, the won-yen exchange rate rose to 1003.61 won on April 6 but sharply dropped to 897.29 won on July 5. After maintaining around the 900 won level for about four months, it began to fall steeply this month, reaching the 867 won range on the 6th. Although it has slightly rebounded to the low 870 won range, the 870 won level is the lowest in about 15 years and 10 months since January 2008 during the global financial crisis.

"Japan unlikely to raise interest rates significantly"…Cause of further yen weakness

The additional decline in the yen is due to weakened market expectations for the Bank of Japan's (BOJ) tightening monetary policy. On the 31st of last month, the BOJ set the upper limit of its long-term interest rate target at 1% and decided to operate its yield curve control (YCC) policy flexibly, but the market still perceives this as more accommodative than expected. The expectation that "Japan might abruptly shift to monetary tightening considering excessive yen weakness and rising prices" has weakened, leading to further yen depreciation.

Lee Ji-pyung, a special professor at Hankuk University of Foreign Studies, explained, "Although Japan's inflation rate is rising, it is expected not to reach the 3% range next year, and it may fall back to the 1% range the year after." He added, "The expectation that the BOJ will not be able to raise interest rates significantly seems to have influenced the yen's weakness." He further explained, "During the deflation era, prices were negative, so real interest rates were positive, but now prices are positive and interest rates are low, so real interest rates are negative," and "the slow pace of interest rate hikes compared to inflation likely also affected the foreign exchange market."

Meanwhile, the Korean won is showing strength against the dollar. The won-dollar exchange rate (closing price) fell from 1357.3 won on the 1st to 1297.3 won on the 6th, then rebounded to around 1310 won. On that day, the won-dollar exchange rate opened at 1309 won, down 1.6 won from the previous trading day. This indicates the won's strength. This is thanks to recent improvements in domestic exports and the semiconductor market. South Korea's current account recorded a surplus for five consecutive months through September, and the decline in semiconductor exports, a key item, is gradually narrowing.

If the weak yen persists... Damage to Korean exports and travel balance

Generally, when the won strengthens and the yen weakens significantly, it is considered a negative factor for Korean exports. The depreciation of the yen reduces the price competitiveness of Korean products compared to Japanese export goods in the international market, which could increase damage to companies competing with Japan in exports, such as the automobile sector.

Park Sang-hyun, a researcher at Hi Investment & Securities, pointed out, "During 2006-2008, the domestic export sector benefited greatly from the China boom, allowing the won-yen exchange rate to endure levels in the 800 won range and even the 700 won range. However, given recent concerns about weakening demand due to the global economic slowdown, the relative overvaluation of the won against the yen could lead to weakened price competitiveness for some export items competing between Korea and Japan."

He added, "The relatively better performance of Toyota's stock compared to Hyundai Motor's recently also seems to be partly influenced by the won-yen exchange rate." According to a report by Nihon Keizai Shimbun (Nikkei), Toyota Motor's half-year net profit reached 2.5894 trillion yen, 2.2 times that of the same period last year, maintaining a high stock price. In contrast, Hyundai Motor's stock price has fallen sharply due to concerns about performance slowdown amid intensified competition in the automobile industry despite good earnings.

The deepening weak yen may also worsen the already large deficit in the travel balance as more South Koreans travel to Japan. According to the Bank of Korea, the travel balance recorded a deficit of 9.37 billion dollars from January to September this year, significantly increasing from the 5.55 billion dollar deficit in the same period last year.

However, many analyses suggest that the impact of the weak yen on the Korean economy will not be significant. The Bank of Korea also explained last summer that unlike in the past, product competitiveness is more important than export prices (exchange rates) now, and since the weak yen is not expected to last long, the impact will be limited. In particular, if the semiconductor market recovers in the second half of the year and overall exports improve, the damage caused by the weak yen could be offset.

[Image source=Yonhap News]

Conflicting forecasts on the weak yen... "Japan must also consider the US"

Experts predict that the impact on the Korean economy will vary depending on the duration of the weak yen. Opinions on the yen exchange rate outlook differ somewhat. Park Sang-hyun said, "Considering the economic fundamentals between Korea and Japan, the won-yen exchange rate is expected to converge again in the 900 won range rather than falling further."

On the other hand, Jeon Gyu-yeon, a researcher at Hana Securities Research Center's Global Investment Analysis Office, said, "Although Japan's consumer prices are expected to exceed 2% in 2024, the Bank of Japan underestimates the inflation as being caused by imported price pass-through and rising oil prices, maintaining an accommodative stance," and analyzed that "the intensity of monetary policy adjustments in 2024 is unlikely to be significant, so the yen's rebound is expected to be limited."

Professor Lee Ji-pyung said, "The won-yen exchange rate in the 860 won range is somewhat excessive, and a range between 900 and 1000 won seems appropriate," adding, "The Japanese Ministry of Finance is creating a rationale that a gradual decline in the yen's value could also deviate from fundamentals, so there is a possibility of intervention to prevent further yen weakness." However, Professor Lee noted, "to intervene, Japan would need to sell US Treasury bonds to buy yen, but given the recent instability in the US Treasury market, Japan is also cautious about the US, making yen defense difficult."