Weakening yen worries Korean exporters

The weakening of the Japanese yen against the greenback is a threat to Korean exporters, particularly in products both countries produce, including automobile and electronic devices.

The yen, which has remained strong against the U.S. dollar for years, and particularly since the global crisis of 2008, has started to weaken.

In just two weeks, the yen has depreciated nearly 5 percent from 76 yen to the dollar at the beginning of February to over 80 yen to the dollar.

The change is the result of an aggressive move by the Japanese central bank to overcome its deflation last month.

Bank of Japan Governor Shirakawa Masaaki in mid-February announced monetary measures to end the nation’s long-running deflation and boost the economy.

The Japanese central bank introduced a “price goal” of raising the consumer price index by 1 percent.

In order to achieve inflation, the Japanese central bank is planning to flood financial markets with its currency by expanding its asset purchase program from 55 trillion yen ($674.5 billion) to 65 trillion yen.

Japan has suffered from recession, a strong yen and damages from last year’s earthquake, tsunami and nuclear crisis.

After the March 11 earthquake, auto parts from Japan were in short supply and its dependency on energy other than nuclear power increased with the shutting down of the Fukushima Daiichi plant, leading to a boost in energy product imports.

Last year, Japan saw its trade balance post a deficit for the first time in 31 years. The last time it had a trade deficit was in 1980 after the oil crisis of the late 1970’s.

Furthermore the country’s fiscal deficit continues to grow. This year, Japan’s fiscal deficit is expected to exceed 20 trillion yen, equivalent to 9.4 percent of the country’s GDP.

“The trade deficit and the central bank’s aggressive plans for quantitative easing have contributed to the weakening of the yen,” said an analyst at Samsung Futures. “The yen may fall as low as 83 yen against the dollar.”

UBS recently revised its yen value projection to 85 yen to the dollar from 80, saying the central bank’s inflation goal will ensure a loose monetary policy for the time being.

Furthermore, with the U.S. economy showing a better performance and the Europe debt crisis stabilizing, global demand for safe assets has been shrinking. Falling demand for the yen as a safe asset is contributing to its weakness.

As the yen falls, the stock value of major export companies, particularly automobile companies, has been enjoying an exceptional rise.

Toyota’s stock on the benchmark Nikkei has gone up more than 20 percent compared to the beginning of the year, while other automakers including Honda and Nissan have also seen their stock values grow in the double digits from the beginning of the year.

During the same period the stock values of Korea’s leading automaker Hyundai Motor and its affiliate Kia Motors moves were limited.

A weakening yen is a particular concern for Korean exporters.

Over the years, the two countries have competed aggressively in the global market of automobiles, electronics and even steel. In most areas, Japan used to have the upper hand.

However, things started to change dramatically when the global economy fell apart in late 2008. While the Japanese yen appreciated, the Korean won fell against the greenback, and Korean companies seized the opportunity and aggressively marketed their products.

As a result, Korean products, which were always considered second-rate compared to Japan’s, started to look just as good and cheaper. Japan’s exporters started struggling to compete.

“The depreciation of the yen will undoubtedly weaken the competitiveness of the Korean companies that was enjoyed in the last five years,” said Lee Jong-woo at Solomon Investment & Securities.

“Especially if the yen falls to 90, Korean companies competing against Japan will suffer,” he said.

Some analysts project that Korea’s global market share in its top 10 export items, including automobiles, automotive parts and petrochemicals, will shrink.

But some think the impact will be limited and the depreciation of the yen will be short term.

“The yen depreciation is a result of the recent instability in the Japanese economic situation,” said Lee Boo-hyung, an analyst at Hyundai Research Institute.

“It is a temporary adjustment and although there are still uncertain factors remaining in the Japanese market,” he said, “when the economy recovers starting from the second quarter of this year, the yen will once again stabilize and appreciate.”

By Lee Ho-jeong [ojlee82@joongang.co.kr]