Continuous Current Account Surplus
Korea’s foreign exchange authorities are concerned over a rapid fall in the won-yen exchange rate with the record current account surplus continuing for close to two years. Situations surrounding the exchange rate wars are getting more and more complicated for the Fed’s tapering of the quantitative easing policy and the possibility of another period of Japanese expansionary monetary policy.
On December 3, the won-dollar rate closed at 1,061.20 won to 1 dollar, gaining four won from the previous session. Nevertheless, the yen-dollar rate fell below 103 yen per US dollar, and the won-yen rate was 1,027.70 won per 100 yen as of 3:00 pm that day. This is the first time in five years that the won-yen rate has dipped below 1,030 won.
The movement is casting a dark shadow over the Korean economy, always characterized by high dependence on exports. Citibank has recently mentioned the weak yen as one of its major downside risks for next year, too. Other foreign investment banks are adjusting the yen-dollar exchange rate forecasts upward as well. According to the Korea International Finance Center, Morgan Stanley and Credit Suisse have come up with a three-month estimate of 110 yen and a 12-month estimate of 120 yen per US dollar.
Exporters in Korea are getting more and more nervous, though the export volume is showing no decline, at least for now. Earlier this year, they claimed that a drop in the won-yen exchange rate would strike a fatal blow to their profitability, but they have posted record profits this year in the end. This means that the authorities cannot take their side any longer.
“The weak yen could disappear in no time if Abenomics loses trust during the global economic recovery, and the exchange rate could rise again amid greater market volatility,” said a banking industry source, adding, “It seems that we don’t have to be worried about the appreciation of the won yet.”