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Dealing with the weakening yen

Published: 04 Mar. 2013, 21:13

It is nearly certain that the yen will continue to weaken as the government of the third-largest economy continues to pursue aggressive monetary easing. The leadership at the Bank of Japan is to be replaced by outspoken advocates of radical expansionary steps who are allies of Prime Minister Shinzo Abe, including Haruhiko Kuroda, president of the Asian Development Bank. Moreover, Washington suggested that it could tolerate Japan’s deliberate depression of the yen. The yen that was valued at 1,380 won per 100 yen a year ago fell more than 15 percent to 1,172 won on Friday.

The yen’s weakening is boon for Japan’s exporters and a nightmare for Korean companies. Korea has maintained a surplus in its trade balance for 13 month in a row, raking up $2.06 billion in surplus trade in February. But exports depended on brisk growth of smartphone sales. Other mainstay exports fell by double digits - machinery by 15.1 percent, steel by 10.5 percent and shipbuilding by a whopping 40.3 percent.

A weaker yen makes Korean products comparatively more expensive and is expected to weigh down the economy in the coming months as the impact of foreign exchange changes on the general economy is usually delayed.

In a visit to the Korea International Trade Association before her inauguration, President Park Geun-hye said that a stable currency is very important for the economy and would be the focus of “pre-emptive and effective” actions.

Her aides later explained that she was not suggesting interventionist policy and argued that the foreign exchange market should be left alone. But unlike other market variants, the currency rate is especially vulnerable to extreme fluctuation.

Authorities sometimes need to step in to “smooth operations” in order to address volatility in the market. The government and monetary officials should study whether local exporters can cope with the weakening yen.

The international currency market has grown more volatile as the United States, the European Union and Japan all resort to monetary easing to boost their economies. We could consider employing levies on foreign exchange transactions according to market conditions in order to stave off an influx of hot money.