Rapidly falling yen: Korean companies must adapt or die
It is unusual for the Korean central bank chief to make public his intention to intervene in the foreign exchange market, and doubly unusual to single out the specific country that prompted the shift in policy.
But that was what the Bank of Korea governor Kim Choong-soo did when he met with foreign correspondents based in Seoul last week. Kim, who used to say that a central bank head should avoid commenting on foreign exchange policy, went out of his way to say he would actively respond to the rapid fall in the value of the Japanese yen.
He had ample reason to target Japan for his shift: As global banking giants observed, South Korea would be one of the biggest victims of Japan's "beggar-thy-neighbour" policy. Japanese Prime Minister Shinzo Abe raised the spectre of a currency war when he vowed to print as much money as was needed to breathe new life into his flagging economy.
In their analysis of Japan's new foreign exchange policy and fiscal expansion, HSBC agreed with Credit Suisse that the largest beneficiaries would be such Southeast Asian nations as Thailand, Malaysia and Indonesia. As the banks said, Japanese corporations, given a shot in the arm, would increase imports from and expand investments in Southeast Asia.
But a low yen would be a bane for Korean industries that are competing against their Japanese rivals in the global markets in exporting electronic products, autos, offshore oilrigs and other products. As one analyst put it, South Korea would be at the forefront of a bloody currency war.
There should be no complaint about a change in exchange rates if it properly reflects a shift in one country's overall economic health vis à vis that of other countries. But few would believe the Korean economy has strengthened so much in relation to the Japanese economy during the past four months as to warrant the won's huge gain against the yen.
The yen posted a 31-month low last weekend when it fell through the ¥90-per-dollar level. It had gained 15.6 per cent since Abe was elected president of the ruling Liberal Democratic Party on September 26 last year. The yen's fall was steeper against the won - 18.6 per cent.
With the Japanese government determined to pour in liquidity until the consumer price index rises to 2 per cent, many market watchers believe it won't be long before the yen slides to ¥100 per dollar. They also believe the yen's fall against the won will undoubtedly accelerate if no action is taken by the Korean government and its central bank.
Aiming to help corporations under siege ride out what it called an exchange rate crisis, the Seoul government came up with a policy package on Tuesday. It focused on a wider insurance coverage of exports, mostly by small and medium enterprises, and the provision of more liquidity for them by government-funded agencies, such as the Export-Import Bank and the Korea Credit Guarantee Fund.
Though these measures may be better than none, they will provide Korean exporters with little protection against the won's rapid gain against the yen. Yet, Korea cannot afford to take the risk of undermining its fragile economic health, committing itself to printing more money and issuing more bonds than warranted, as Japan did. It has few other options than to wring its hands until Japan is pressured by the international community to abandon its policy.
Under these circumstances, Korean electronics corporations, auto-makers, shipbuilders, steelmakers and other businesses will have to go back to basics, focus on research and development and move up to the manufacture of higher-end products while keeping their heads above water.
In other words, they are called on to turn the current adversity into an opportunity and empower themselves to become top-tier global players to be reckoned with. If such a transformation appears to be a mission impossible, they are urged to remind themselves what their Japanese counterparts did under similar conditions.
Many of them were no less versatile and competitive when they emerged from the 1985 Plaza Accord, which had pushed up the yen more than 50 per cent against the dollar during the next two years.