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Predicts Economic Contraction This Year If the Strong Won-Weak Yen Trend Worsens
Samsung Economic Research Institute
Predicts Economic Contraction This Year If the Strong Won-Weak Yen Trend Worsens
  • By matthew
  • March 14, 2013, 14:06
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A new report predicted that if the strong won-weak yen trend continues further, it will significantly dampen Korea’s growth for this year. The report even warned of negative growth. The report entitled, “Ripple Effects of a Strong Won and a Weak Yen and Countermeasures,” authored by researchers including chief researcher Jung Yong-sik at Samsung Economic Research Institute (SERI) and released on March 13, published the results of an analysis of the impact of further won appreciation and yen depreciation on Korean economy and industry as a whole based on scenarios.

There are two scenarios. The first one assumes that the average annual won to dollar exchange rate and the average annual yen to dollar exchange rate are 1,000 won and 76,100 yen, respectively. As a result, Korea’s economic growth rate for this year would drop off 1.8 percentage points on a strong won and weak yen. Export growth rate also would slide 2.0 percentage points. Machinery and automobile, areas in which the country competes fiercely with Japanese firms on export markets, would suffer a sharp contraction, losing 7.5% and 6.4%, each. Current account surplus would fall by $12.5 billion, and the rate of growth in consumer prices would drop 0.4 percentage points.

The second scenario is based on even more dangerous assumptions. It assumes things will be an exact repeat of 2007, with the won/dollar exchange rate of 930 won and the yen/dollar rate of 118 yen. That would push down Korea’s economic growth rate by as much as 3.8 percentage points, resulting in a 1.0% degrowth, given the Bank of Korea’s economic growth forecast of 2.8% for this year.

Export growth rate would decline 4.2% percentage points and current account surplus $25.5 billion. Exports would fall in such fields as machinery, automobile, and electricity & electronics by 32.2%, 27.6%, and 16.3%, respectively. Under these circumstances, as much as 85.9% of all exporting companies would see their operating profits swing into negative territory, a rate more than twice as high as the current rate of 33.6%, at the time when the won-dollar and the yen-dollar exchange rates stand at 1,082 won and 94.5 yen, each, and much higher than the 68.8% under the scenario 1. A whopping 92.9% of carmakers and 91.0% of electrical & electronics companies would be underwater. Rate of operating profits would plummet to negative 10.1% for large companies and negative 13.3% for small and medium-size ones.

Jung said, “In order to recover from the shock of a strong won and weak yen, a trend that hasn’t emerged in Korea over the past five years, comprehensive countermeasures need to be put in place.” He urged the authorities to introduce “Tobin Tax” and impose ever-stricter regulations on short-term foreign debt and the foreign currency liquidity held by financial institutions. He also recommended that companies strengthen their core competitiveness by focusing on high-tech, high value-added areas while keeping a tight rein on currency risk and costs.