Forex Fluctuations
The Korean economy recorded a growth rate of less than 1 percent for the fourth consecutive quarter due to the sluggish domestic consumption, and the weak yen is compounding the matter by affecting automobile, machinery, and electronics exporters.
The won-yen exchange rate hit a seven-year low on April 23. “The current level at 800 won or so per 100 yen is comparable to that during the recent global financial crisis,” said Kim Jung-shik, economics professor at Yonsei University, adding, “This is a warning signal for the Korean economy.”
According to the Bank of Korea, the Korea-Japan export similarity index has continued to go up from 0.449 in 2007 and 0.455 in 2009 to 0.475 in 2011 and 0.501 in 2013. A similar export index of 0.501 means that 50.1 percent of the items exported from both countries are similar to each other. “The weak yen is likely to have a negative impact on not only finished goods suppliers but also small component manufacturing firms working with them,” the central bank explained.
The business profit rates of Korean and Japanese companies had been equal to each other at 5.7 percent in 2011. However, the percentages became 5.2 percent vs. 5.8 percent in 2012, the first year of the recent weak yen, and the gap has widened to 1.8 percentage points in 2013 and 2.4 percentage points in the third quarter of last year. According to Korea Exim Bank’s recent survey data on 126 larger exporters and 327 smaller ones, the won-yen exchange rate fluctuations as of late have resulted in a 5.6 percent decline in the latter’s exports and a 1.8 percent decrease in the former’s.
Options are limited for the Korean government because the yon-yen exchange rate is an arbitrary rate of exchange hinging on the won-dollar and yen-dollar rates. In order to block the weak yen, the Korean government should intervene in the won-dollar exchange because of the lack of a won-yen direct trading market. However, this seems rather impossible for now. The U.S. Department of the Treasury recently criticized the Korean government for its intervention in the forex market.