Minimize the economic shock

Growing worries over the extent of the damage from the massive earthquake in Japan are casting a dark shadow over markets around the world. The Nikkei Index dropped by a whopping 10.55 percent yesterday, a much steeper fall than the 6.18 percent decline on Monday. A sense of crisis arising from the possible meltdown of nuclear reactors in Fukushima Prefecture in particular weighed down on Japan’s stock market.

The shockwaves from Japan have reached the stock market in Korea, with the Kospi index plunging 2.4 percent yesterday. That sharp downturn came close to the one seen after the financial crisis on Wall Street. Economists say the economic repercussions will likely reach the U.S. and European markets as Japan is the world’s third largest economy, with 8.7 percent of the world’s GDP.

The earthquake will have a bigger impact on our economy than expected. Japan accounts for 6 percent of Korea’s exports and 15.1 percent of our imports. It is the third largest market for our exports and the second largest market for our imports. If Japanese investors decide to pull out investments in Korea to reinvest in Japan in an attempt to overcome the crisis, it will cause a big problem for Korea’s financial markets. The exchange rate of the Korean won against the U.S. dollar has been on an upward spiral, weakening the won’s value for four days in a row. The average gasoline price has also topped 1,940 won per litter, nearing the level in 2008 when the petroleum price hit $140 per barrel.

All of this bodes ill for the Korean economy. The government should not allow panic to dominate the market. The Japanese government has already rolled up its sleeves to aggressively cope with the crisis. Japan’s financial authorities have started to implement an ambitious plan to provide the market with liquidity reaching almost 3 percent of the entire GDP. If the money is not enough, developed countries are also expected to provide the financial support necessary to rebuild Japan.

Korean markets are very vulnerable to external shocks. If players in the market follow each other blindly, they will only cause more damage. All the players should make judgments as calmly and rationally as possible. Both the government and the corporate world must fully examine the situation to avert a crisis that could occur when local companies have trouble importing components from Japan. The government must come up with economic measures to minimize the economic shock in any scenario.