[Viewpoint]Exchange hands

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[Viewpoint]Exchange hands

The recent sharp fall in the exchange rate of the Japanese yen to the Korean won is a major concern. The won-yen exchange rate dipped 13.8 percent in 2005 and another 13.3 percent in 2006. The trend has not stopped. The won fell 2.8 percent in the first half of this year.
The current account deficit of the United States has led to a weakening of the U.S. dollar all around the world, and this has also made the won-dollar exchange rate sink.
On the other hand, the dollar-yen exchange rates have not fluctuated much, with the tacit approval of the United States. Thus, the won-yen exchange rates have fallen accordingly.
Korea imports more from Japan than any other country, and Korea is Japan’s third-largest export market.
Therefore, Korea is probably affected more by the fluctuation of the yen than any other currency.
If the won-yen exchange rates continue to fall, it could cause Japanese exporters lower their export prices, which are stated in won. Because of this, Japan can increase the amount it exports to Korea to a maximum level.
On the flip side, Korean exporters will have to raise their prices in yen when exporting to Japan. That means Korea’s exports to Japan will decrease.
Korea’s trade deficit with Japan expanded from $24 billion in 2005 to $25.4 billion in 2006, and this trend is continuing this year. Because the exchange rate makes Japanese prices comparatively lower than prices in Korea, Korea’s balance in tourism with Japan is deteriorating. That is why the number of Korean people visiting Japan to shop has risen sharply recently.
Although the sudden fall in the won-yen exchange rate will theoretically have a big impact on Korea’s economy, people in the business do not feel like it is real.
This is because Korea has diversified its trading partners. That reduces the effect of the won-yen exchange rate on Korea’s exports. Also, the growth of the Chinese economy and the improving U.S. and European economies are helping Korea’s exports.
Korea’s trade balance recorded a profit of $23.2 billion in 2005 and $16.1 billion in 2006 respectively, and we are doing better than expected for the first half of this year.
Thus, even if the trade deficit with Japan expands, other surrounding economic conditions do not look as bad compared to other times in the past. Therefore, people don’t feel like it is necessary for the government to intervene in the foreign exchange market.
If the won-yen exchange rate continues to worsen, when the prosperous condition of the world economy comes to a halt, that will make it harder for Korea.
Therefore, we need to be prepared for such a situation.
First, we have to establish a plan to revitalize the won-yen exchange market. The won-yen exchange rates are decided automatically, based on both the won-dollar exchange rates and the dollar-yen exchange rates. Since it is probably not true to say that the current won-yen exchange rate fully reflects the basic economic conditions between Korea and Japan, the won-yen exchange rate has been distorted.
The government decided not to establish a direct won-yen exchange market, which runs separately from the won-dollar market with an independent won-yen exchange rate, in April of this year because there was not enough demand or supply.
However, we need to keep in mind that the development of a won-yen market might ease the excessively high evaluation of the Korean won through interactions between the won-yen exchange rates and the won-dollar exchange rates.
In order to promote a won-yen direct exchange market, it is necessary to consider a method of raising the weight of yen settlement when settling large amounts of export and import accounts.
Since the 1990s, the Japanese government has been encouraging the use of the yen in trades to raise the international influence of the currency.
The yen’s growth in influence has been troublesome to Korea. Since the weight of the U.S. dollar in the settlement of trade is more than 90 percent, it would not be bad to adjust it a little.
If we expand the weight of the yen in settlements, it could relieve the shock from the fluctuation of the dollar, and help activate the won-yen direct exchange market.

*The writer is a professor of economics at Dongguk University. Translation by the JoongAng Daily staff.

by Kang Sam-mo
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