Falling yen feared to slow Korea’s exports

Falling yen feared to slow Korea’s exports. January. 30, 2011 19:04. imsoo@donga.com constant25@donga.com.

The downgrade of Japan’s sovereign credit rating will have a limited impact on the Korean economy, but the yen`s falling value stemming from the downgrade will likely impact Korea’s financial market and export industries.

Fiscal risks that had been limited to a few European countries are also feared to trigger credit rating downgrades of other countries, including the U.S., and cause the recovering global economy to tumble anew and go into double-dip recession.

The Strategy and Finance Ministry said Friday, “Because S&P already rated Japan’s credit outlook to ‘negative’ citing the country’s serious fiscal crisis in January last year and signaled a downgrade, the downgrade is having little impact on the market.”

Japan’s benchmark Nikkei Index plunged 1.13 percent due to the shock from the downgrade, but this had relatively little impact on the Korean stock market.

The benchmark KOSPI index fell to below 2,100 momentarily as Japan`s downgrade caused investor sentiment to deteriorate further amid underlying burden stemming from the recent stock rally. But the market closed at 2,107.87, down just 0.34 percent from Thursday.

Experts say Japan`s downgrade will have limited immediate impact on the Korean economy, but that it will increase volatility of the Korean foreign exchange and stock markets.

Lee Jong-seong, a researcher at Hana Daetoo Securities, said, “Following the downgrade of Japan’s credit rating, the yen has seen its value decline sharply,” adding, “Increased volatility of the won-yen exchange rate could result in volatility in the stock market.”

The won-dollar exchange rate closed at 1,113.80 in Seoul Friday, down 0.6 points from Thursday. The rate dipped to 1,347.9 at 3 p.m. Friday.

Mounting downward pressure on the yen’s value will increase the volume of yen-carry trade (investment of low-interest yen loans in high interest assets), which could lead to excessive liquidity in the global financial market.

A hike in the won’s value stemming from the weakening yen will have a negative impact on Korean exporters, which compete with Japanese rivals in export markets. Korean exporters in sectors such as IT, chemicals, shipbuilding and cars have enjoyed higher price competitiveness in export markets due to a strong yen, but will likely suffer from the weakening yen.

Experts say Japan’s downgrade stemming from its national debt could rekindle global fears over the severity of fiscal deficits in advanced economies, and thus amplify uncertainty. They say the move could heighten concern over credit ratings of other advanced economies with huge national debts, including the U.S.