Bracing for a falling yen

The yen has set a southbound course after G7 countries and central bank leaders issued statements condoning the weakening trend in the Japanese currency as the result of the country’s ultra-loose monetary policy, and saying that it will help stimulate the world’s third-largest economy.

U.S. Under Secretary of the Treasury for International Affairs Lael Brainard said the United States supports Japanese efforts to fight deflation, a comment that sent the dollar to 94.46 yen, its highest since May 2010. Jens Weidmann, Deutsche Bundesbank president and a member of the European Central Bank Governing Council, also said there was no sign of the euro being overvalued, dismissing talks of interventions aimed at weakening it.

The G7 statement said that the major economies were committed to “market-determined exchange rates.” But it added that fiscal and monetary policies should not be directed at devaluing currencies - a comment that could be critical of Japan’s monetary strategy. The yen slightly rebounded after the statement. But investors will likely have mixed feelings until the G20 meetings of finance ministers and central bank governors in Moscow on Friday.

Countries differ in their responses to Japan’s aggressive easing policy, which means that concerted efforts to turn the yen’s weakening trend won’t be easy. Moreover, the Korean won continues to strengthen despite North Korea’s third nuclear test. Considering the selling position, the yen’s weakening could accelerate.

The weaker yen is already taking a toll on Korean exporters as they mostly compete with Japanese products on the international market. Economic think tanks estimate Korean exports could drop by 6 percent if the dollar shoots up to 100 yen. Korean companies would lose competitiveness in industrial exports as well as investment affordability. The tourism industry has already been hurt, with a sharp drop in visitors from Japan.

Exchange rate changes affect the economy months later, which mean actions to counter side effects should begin now. We should side with China, France and other states who are anxious about Japan’s currency interventions during the G20 meeting.

Financial and monetary policies should be directed at stimulating the economy in the face of a double whammy of sluggish home demand and the unfavorable exchange rate. Securities companies have begun to downgrade earnings estimates for local companies. The yen’s weakening could push the Korean economy to the edge. Emergency situations call for emergency actions.