[Viewpoint] How to survive the ‘currency war’

If I do it, it’s true love; when others do it, it’s adultery.

The Korean adage perfectly describes the current global currency debacle. Japan last week joined the popular blame game. Prime Minister Naoto Kan urged Korea and China “to act responsibly within common rules.”

Yoshihiko Noda, Japan’s finance minister, was more bluntly critical of Seoul, saying, “South Korea intervenes in the currency markets as needed while China in June started to move towards a more flexible renminbi, albeit too slow.”

He lashed out that Korea’s intervention - despite the country’s status as host of the G-20 Summit in November - will face censure from the participants after they land in Seoul.

Korean officials were naturally dumbfounded to hear such accusation from Japan, which spent $25 billion in September for dollar-buying interventions to weaken the yen. As one person said: “To err is human. To blame others is politics.”

Korea protested, with Bank of Korea Governor Kim Choong-soo criticizing the comment as “inappropriate.” Japan backpedaled slightly, saying the remarks had been slips of the tongue.

Whether there were political motives or not, Japan can hardly be blamed for wanting someone to lash out at on currency issues. Since the Plaza Accord in 1985, an agreement among the Group of Five to fix global imbalances by forcing the yen to appreciate against the U.S. dollar, Japan has had to live with a strong yen that has made their products more expensive on the global market for the past 25 years.

The so-called lost decade, which has actually been two decades, can be entirely attributed to the strong currency. Japan’s hypersensitivity to the yen’s strengthening is understandable.

Nor can Korea be entirely cool over currency issues. It had to swallow the humiliation of a global bailout from a runaway won after the Asian financial crisis began in 1997.

Any forces fanning the won’s rise become national enemies. Any state would turn defensive if it skidded toward bankruptcy because of currency appreciation.

Since then, the merits of a weak won have been ballyhooed. Authorities and economists keep reminding us that a fall in the won’s value of such-and-such percent would boost exports and the current-account surplus, later translating into a growth of such-and-such percent.

But nothing can be perfect, and that’s true too of a currency’s weakening. A weaker won makes imports more expensive and fans inflationary pressure, damping local consumer and corporate spending.

The Korea Development Institute estimated two years ago that a 5 percent fall in the won’s value from 1,000 won to the dollar would cause domestic consumption and capital investment to slip 0.69 percent and 0.83 percent, respectively, while cause the consumer price index to gain 0.49 percentage points.

And while the current-account surplus may increase $5.68 billion, “it is more like subsidizing exporters by taxing consumers and companies earning in the domestic market,” according to the KDI.

In contrast, a strong won leads to a fall in consumer prices, an increase in consumption and a boost in income. A strong won benefits more common folk.

A look at the data indicates that the won has been one of the world’s most undervalued currencies in recent years. According to the real effective exchange rates - the weighted average of the local currency compared to major foreign currencies adjusted for inflation - calculated by the Bank for International Settlements, the won was rated 81.7. An index lower than 100, based on rates in 2005, indicates an undervalued currency.

The won figure hovers below 89.41 for the U.S. dollar, 103.95 for the yen and 119.65 for the yuan. We may protest that it’s unfair to compare the won at its peak in 2005, but we cannot deny that the won has been weaker compared to the currencies of our key trading partners, at least for the last five years. Japan had reasons to be resentful of its rival exporter Korea.

We therefore are deeply involved in today’s “currency war.” If we sit on the sidelines, we may end up as a victim. We should make a pre-emptive move. For example, we can offer to link the won with the yuan for a certain period to prompt, say, a 20 percent rise within the next three years. We then buy time for our companies and consumers to brace for a stronger won. There also would be no need to worry about a drastic movement in foreign capital.

We can tame inflation this way. We also can claim to be an authoritative voice as the host country of next month’s G-20 meeting by taking such a responsible step.

President Lee Myung-bak pledged to take a proactive mediating role to prevent a currency war. If we first offer our concession, we can persuade others to follow suit. But most of all, we will be doing our economy a big favor by building resilience into the world’s most trade-dependent economy against foreign-exchange rate shocks from overseas.

*The writer is the business news editor of the JoongAng Sunday.

By Lee Jung-jae