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What the weaker yen policy means for Korea

Posted January. 21, 2013 03:14,   


The yen-dollar exchange rate closed last week at 90.03 in the Tokyo Foreign Exchange Market. In Japan, the 90-yen rate has been dubbed “Abe’s exchange rate,” which is the first economic goal of the Japanese government led by Prime Minister Shinzo Abe. His economic policies are nicknamed “Abenomics,” which is centered on a policy of monetary easing and expansion of public investment. With the exchange rate at 90.03 of last week, the Abe government achieved its first goal within a month of taking office.

Though difficult to describe in one sentence what the future holds for a weaker yen under Abenomics, one thing is clear: a weaker yen will revitalize the Japanese economy. The Nikkei average, a major stock index in Japan, surpassed 10,900 yen (121 U.S. dollars) Friday for the first time in 33 months, pushing up shares of Japanese exporters, who will benefit from a weaker yen.

Economic recovery in Japan will be good news to the global economy. Paul Krugman, a Nobel laureate in economics and a professor of economics and international affairs at Princeton University, welcomed the weaker yen policy in his column for the International Herald Tribune, saying, “Japan’s bold quantitative ease will boost not only the economy of Japan but also that of the world.” He has recommended an inflation policy for Japan.

The pace of the yen`s depreciation, however, is too fast to be ignored by Japan`s neighbors because a high exchange rate absorbs exports from other countries, not increase global trading volume. If other countries again decide to weaken their currencies to stay afloat as they did in 2010, this can hinder global economic recovery. International Monetary Fund chief Christine Lagarde said on Japan`s fiscal policy, “The (fund) will do its best to prevent countries from choosing the `beggar-thy-neighbor` policy."

The direct victim of a weaker yen is Korea. But the government should not start lowering the won`s value. Yet at the same time, Korean companies have long basked in the benefits from the relatively strong yen and weak won. The won-to-100 yen rate has increased from the 300 range in the early 1980s to the 500 range in the 1990s, the 1,000 range in the early 2000s, and the 1,170-1,500 range in the 2010s. The rate is now 1,175 won, hardly an extreme figure.

Korean financial authorities simply cannot fend off all the fallout from the solid currency inflation policies of the U.S. and Japan. But Korea needs policy efforts to prevent radical changes in foreign exchange rates. One answer is to use preemptive efforts to block the inflow of hot money so that the won will not appreciate. Policies meant to check and improve the competitiveness of small and vulnerable exporters should not be missed as well. Exporters, on the other hand, must raise their competitiveness to survive in a difficult foreign exchange environment.