[Super Enjeo]⑦ "Caution on Export Impact in Automobile and Steel Sectors"... Continued Departure of Ilhak Gaemi

Yen Weakness May Negatively Impact Korean Exports
Need to Strengthen Support for Highly Competitive Export Items Like Automobiles and Machinery

[Image source=Yonhap News]

As the value of the Japanese yen has fallen to its lowest level in over 37 years, a phenomenon known as the 'super yen depreciation' continues, raising concerns that the weak yen could negatively impact South Korea's economy, particularly exports. As the yen's weakness extends longer than expected, individual Korean investors who have invested in Japanese stocks are continuing to sell off their holdings.

This month, the yen-dollar exchange rate surpassed 161.72 yen during trading hours, marking the highest level (weakest yen) in about 37 years and 6 months since December 1986, when Japan was suffering from an economic bubble. The yen, which hovered around 140 yen per dollar at the beginning of this year, has surged by about 20 yen in half a year, sustaining the so-called 'super yen depreciation.'

The problem is that Asian currencies are weakening simultaneously, which also affects South Korea's exchange rate. On the 3rd, the won-dollar exchange rate in the Seoul foreign exchange market closed at 1,390.6 won, up 2.4 won from the previous day. This is the first time in two and a half months since April 16 (1,394.5 won) that the exchange rate has risen to the 1,390 won level based on the closing price. On the same day, the yen-dollar exchange rate also exceeded 161.9 yen during trading hours, reaching the highest level since 1986.

The Korean won shows a high correlation with Asian currencies. In particular, since Japan is a competitor with South Korea in the global export market, the depreciation of the yen is likely to lead to a weakening of the won. The Bank of Korea analyzed in last month's 'First Half Financial Stability Report' that “due to the highlighted export competition with Japan, the won and yen have shown a high correlation in recent years.” While a weaker won and rising exchange rate can increase profits for domestic exporters, sustained high exchange rates can raise import costs for raw materials such as crude oil and minerals, which may burden corporate profitability.

Some export companies competing with Japan may find themselves at a disadvantage. According to the Korea Economic Research Institute, as of 2020, the export competition index between South Korea and Japan was 69.2, higher than major countries such as the United States (68.5), Germany (60.3), and China (56). It is also estimated that if the yen's value against the dollar falls by 1 percentage point, South Korea's export prices would decrease by 0.41 percentage points and export volumes by 0.2 percentage points. This indicates that yen depreciation adversely affects South Korea's export prices and volumes.

The impact could be particularly significant in sectors with high export competition, such as petroleum products and automobiles. According to the Korea International Trade Association, as of 2022, the export competition index between Korea and Japan for petroleum products was 0.827, followed by automobiles and parts (0.658), ships (0.653), and machinery (0.576). The closer the export competition index is to 1, the fiercer the competition in the export market.

Jung Young-sik, head of the International Macroeconomic and Financial Research Division at the Korea Institute for International Economic Policy, pointed out, “Due to the yen depreciation, Japanese products have become cheaper than South Korean products in the global market,” adding, “Items with relatively high export competition indices such as automobiles, automobile parts, machinery, and petroleum products may be affected by the yen depreciation.”

Kim Chang-beom, executive vice president of the Korea Economic Association, emphasized at the seminar 'Falling Yen Outlook and Response' on the 3rd, “The yen depreciation phenomenon could negatively impact the Korean economy, so we must closely monitor yen trends,” and added, “Although the export competition index between the two countries has somewhat decreased compared to the past, Japan remains South Korea's fiercest competitor in the global market, so financial and industrial countermeasures should be prepared for the possibility of prolonged yen depreciation.”

Jung Cheol, head of the Korea Economic Research Institute at the Korea Economic Association, also said on the same day, “If the super yen depreciation intensifies, major exporting countries including South Korea will be negatively affected, and Japan will not benefit either,” and stressed, “Efforts to strengthen export support such as research and development (R&D) for items with high export competition with Japan are required to mitigate the impact of the super yen depreciation.”

Individual Korean Investors Continue Net Selling... Yen-Tech Still Aims for Yen Rebound

On the 26th, amid trade tensions between the United States and China, the Japanese yen's value rose intraday to 104 yen, its highest level since 2016. At the KEB Hana Bank Counterfeit Response Center in Euljiro, Seoul, an employee is organizing yen currency. Photo by Moon Honam munonam@

Meanwhile, individual Korean investors who have been caught in yen depreciation investments continue to sell Japanese stocks. Unlike in the past, when low yen values attracted bottom-fishing buying, recently concerns over prolonged yen weakness have led to selling. The Nikkei 225, Japan's representative stock index, surpassed the 40,000 mark for the first time in March this year, leading to a boom that encouraged individual Korean investors to continue net buying. However, as the yen depreciation has lasted longer than expected, these investors are now under pressure to sell. According to the Korea Securities Depository, domestic individual investors have net sold approximately $58,985,589 worth of Japanese stocks from the beginning of this month through the 22nd. This is the largest monthly amount since September 2020 ($48,472,173). Individual Korean investors had been net buyers of Japanese stocks since April last year but switched to net selling from last month.

The 'Yen-Tech' craze, which aims to profit from a yen rebound amid the super yen depreciation, remains strong. Investors are trying to realize foreign exchange gains by buying yen at low prices now. According to the 'Resident Foreign Currency Deposit Trends for June 2024' released by the Bank of Korea on the 19th, the amount of yen deposits held by residents increased by $60 million from the previous month to $10.13 billion last month, marking two consecutive months of growth. The domestic yen deposit size first exceeded $10 billion in May.

Yen carry trade funds also remain abundant. Yen carry trade refers to borrowing low-interest yen to invest in stocks or bonds of countries with higher interest rates. According to estimates by Deutsche Bank, the size of such funds reached about $20 trillion at the end of last year. This amount continues to grow. Jung explained, “Due to the interest rate differential between the U.S. and Japan and expectations of yen depreciation, the scale of yen carry trade is increasing.”