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Weak Yen Threatening S. Korean Economy
Potential Risk
Weak Yen Threatening S. Korean Economy
  • By lsh
  • October 31, 2017, 02:45
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The weak yen coupled with interest rate hikes by the Fed is said to be a huge risk on the part of the South Korean economy.
The weak yen coupled with interest rate hikes by the Fed is said to be a huge risk on the part of the South Korean economy.

 

The exchange rate of the Japanese yen is one of the major indices that affect the South Korean economy. South Korea’s petrochemical, steel, machinery, automobile, consumer electronics and IT exports tend to fall by 13.8%, 11.4%, 7.9%, 7.6%, 6.9% and 6.9% when the won-yen exchange rate shows a decline of 10%.

On October 30, the exchange rate fell from 989.72 won to 989.31 won per 100 yen. The rate dipped below 1,000 won per 100 yen in the second week of this month is showing no signs of rebounding. This is mostly because of so-called Abenomics and the Bank of Japan (BOJ) is planning to maintain its monetary easing policy for a while. Prime Minister Shinzo Abe’s Liberal Democratic Party won the lower house election on October 22 and BOJ Governor Haruhiko Kuroda is expected to serve another term from April next year.

“Abenomics and the weak yen are likely to continue for at least a couple of years,” said Konkuk University professor Oh Jung-keun, adding, “An even bigger concern is the weak yen coupled with interest rate hikes by the Fed, which can be a huge risk on the part of the South Korean economy.”

According to the Export-Import Bank of Korea, a 10% decline in the won-yen exchange rate leads to a 4.6% decrease in South Korea’s exports. According to the Hyundai Research Institute, South Korea’s exports fall 1.4% and its economic growth rate falls by 0.27 percentage points when a decrease in the value of the yen exceeds a decrease in the value of the won by a margin of 5%.

The depreciation of the yen negatively affects South Korea’s exports while allowing Japanese companies to invest more in R&D and boost the quality of their products. This has already occurred in fact. During the recent three years, Japanese companies opted for an increase in investment and profitability instead of price competitiveness while benefitting from the weak yen and now they are more ahead of South Korean exporters than before.