[EDITORIALS]Boost competitivenessThe Korean financial market is shaken as the finance ministers and central bankers from the Group of Seven triggered a strengthening of the yen against the dollar. The Korean won’s exchange rate hit its strongest level against the dollar in almost three years on Monday, and the stock market fell sharply. It seems that the turbulence in the Korean financial markets may last for some time. The expectation of economic recovery seems further away as exports, which have strongly contributed to the economy’s growth even when the domestic market has lagged, have been hit by the recent currency appreciation.
The exchange rate conflict led by the United States had been foreshadowed long ago. China, which has linked its currency to the dollar and prevented its appreciation amid a large trade surplus with the United States, is one of the causes of the recent conflict, but the Japanese monetary authorities also have been severely criticized for spending over 10 trillion yen this year alone to prevent the Japanese currency from appreciating.
The main concern is that this conflict will not end soon. Not only will the U.S. trade deficit not be easily reduced, but the Bush administration, which is facing a presidential election next year, will want a weaker dollar.
While the United States is mainly targeting China and Japan, Korea is also suspected of manipulating its exchange rate, and pressure to appreciate the won will not be relieved. A strong won, however, will make the situation worse for the Korean economy, which is already stagnating. The pressure of a strong won on exports is less than in the past, since more than half of exports go to Asian countries, whose currency values are increasing, and export dependency on America has decreased.
Even though foreign exchange market intervention is limited, the government will have to try to stabilize the exchange rate so the rise will not be too steep. In order to avoid being constantly affected by changes in the exchange rate, the best policy is to strengthen Korea’s economic power internationally. A thorough restructuring of companies is necessary to improve productivity and reduce costs.