KITA Report Predicts
The Japanese yen-U.S. dollar exchange rate rose to 146 yen per U.S. dollar on the Tokyo foreign exchange market on Aug. 17. It reached the highest level in nine months since November 2022 and the highest so far this year.
While the Japanese yen has stayed at one of the lowest points in history, the Korean won has continued to depreciate alongside the Japanese yen, but it will not have such a negative impact on Korea’s exports, the Korea International Trade Association (KITA) said in a report about the impact of won-yen exchange rate changes on Korean exports on Aug. 21.
In the report, KITA researchers delved into the devaluation of the Japanese yen, which has been intensifying since the implementation of “Abenomics” in 2012. While major countries such as the United States are raising interest rates in line with the tightening of monetary policies, Japan has been pursuing unlimited quantitative easing policies led by the Bank of Japan (BOJ), gradually widening its interest rate gap with the United States. Japan’s persistent trade deficit and the recent narrowing of its current account surplus have been blamed for the yen’s weakness.
Despite the record low yen, KITA believes that the deepening of won-yen synchronization will not hurt Korean exports. This is because, since the second half of 2014, won-yen synchronization has been strengthening. Since 2021, the movements of the two exchange rates have been very similar, not only in direction but also in size.
In fact, the correlation between the won-yen exchange rate from 2021 to June 2023 is even wider than the correlation between the won-yen exchange rate from the second half of 2014 to June 2023 (0.750), reaching 0.973 which belonged to a very high level.
“Since the second half of 2014 won-yen synchronization has strengthened, and especially since 2021 the movements of the two exchange rates have been very similar not only in direction but also in volume,” KITA said. “Over the past decade, the Korea-Japan Export Similarity Index (ESI) in the Chinese and U.S. import markets has been easing.”
In global export markets, the Korea-Japan ESI has also been declining since 2012. In 2022, the Korea-Japan ESI was 0.458, down by 0.022 points from 2012.
However, the KITA report suggested that Korea expand its R&D investment, focusing on items with high Korea-Japan ESIs in the global market. In the case of wireless communication equipment and parts and ships with high Korea-Japan ESIs, Korea’s exports have shown double-digit declines over the past five years, down 16.7 percent and 10.4 percent, respectively. So they need improving.
In addition, exports of products with comparative advantages are less affected than those with exports of products with comparative disadvantages. In particular, semiconductors had a higher Korea-Japan ESI than the average of all industrial items (0.458 in 2022), and the Korea-Japan ESI has intensified over the past five years in the semiconductor sector. However, Korean exports of semiconductors to the world grew by an average of 12.5 percent from 2017 to 2022 due to their relatively high comparative advantage.