[EDITORIALS]Yen's undertow perils won

The much-feared weakness in the Japanese currency has become a reality. The yen has sagged to a new three-year low of 130.95 against the U.S. dollar. The value of the yen has long been on the downward slope, and the question is how much further it will decline. It has sunk more than 5 percent in just a month or so, making exchange-rate issues the biggest challenge in Korea's economic policy next year.

The main causes for the yen's slide are the weakening economic fundamentals of Japan's economy and its shaky financial system. While the U.S. economy has been crawling out of its bottom since the Sept. 11 terror attacks, the Japanese economy, far from recovering, continues to go downhill. Although Tokyo lowered interest rates and loosened its economic purse strings, its economy shows no sign of recovery and is sinking more deeply into a so-called liquidity trap. It can be said that a sagging yen is the last card Japan has under such a situation.

The Japanese government seems to believe that a weaker yen would be a good way out of the recession. Tokyo expects that a flagging yen could brake the deflationary cycle, in which prices fall amid a contracting economy, and instill a new life into the struggling economy. If Japan manages to recover its economic vigor, it would have a positive impact on the global economy. That is why the United States is poised to condone the yen's weakness, considering the severity of the situation in the Japanese economy. China also remains silent, as the yen's slide has not triggered a round of currency devaluations in Southeast Asia.

The question is whether such a scenario would really happen. What needs our particular attention is the impact of the yen's further fall on Asian financial markets. As seen in China's rejection of the Japanese demand for an appreciation of the Chinese yuan, competitive devaluations in Asian currencies set off by a sliding yen, combined with Argentina's economic fiasco, could bring ominous clouds over international currency markets.

A further fall in the yen would not leave the Korean won unaffected. Because a weak yen would have negative effects on Korea's economy, some experts say, it would be impossible for the won alone to remain strong.

But as there is more for Korea to lose than to gain from the weakening of the yen, we cannot help being concerned about its possible ripple effects on the country's exports, trade balances and economic growth. The yen's slide would provide a big stumbling block to Korea's efforts to export its way out of an economic slump. Already, local businesses fear that a won-yen exchange rate below 10 to 1 would deal a devastating blow to Korea's overseas shipments and introduction of foreign investments. According to a study by the government-run Korea Institute for Industrial Economics and Trade, a 10 percent decline in the value of the yen would lead to an annual $1.9 billion reduction in Korea's trade surplus.

What worries us is the projection that the yen will continue to weaken until mid-2002. Some experts forecast that the Japanese currency will slide to more than 140 yen against the greenback. The Korean government has few policy tools to cope with a further decline in the yen. It should do its best to keep the won stable by maintaining the country's economic soundness and taking indirect measures to control the currency's supply and demand. Local companies should try to hedge foreign-exchange risks and export more to Japan.