Report dissects economic ‘perfect storm’ for exports

For every 1 percent increase in the won’s strength against the yen, Korean exports dip 0.18 percent, and a weakening yen will be particularly painful for Korea’s automakers, steelmakers, electronics manufacturers and textile companies, according to a report done by the Korea Institute for Industrial Economics and Trade showed yesterday.

Researchers examined won-yen, won-dollar and yen-dollar exchange rates from 2005-2012. The report said the weakening yen driven by Japanese Prime Minister Shinzo Abe’s pledge for quantitative easing to end prolonged deflation and increase exports will hit Korean automobile, steel, electronics and textile companies hard since they rely on exports and compete directly with Japanese rivals.

The institute said Korean automakers are in a heated competition with the Japanese over exporting more compact cars to the United States, Europe and Middle East, while steelmakers compete with their Japanese counterparts in China and Southeast Asia.

In the United States, China and EU, Korean and Japanese companies are in a fierce battle to expand their market share in digital TVs and lighting products. In China and Vietnam, they compete over textiles.

The institute, however, noted that information communication devices, displays, semiconductors, petrochemicals, general machinery and shipbuilding will see limited impact from the weak yen because Korean companies have managed to either differentiate their products or are technologically superior.

“The latest weaker yen trend that started since last year is different from weak yen trends in the mid-1990s and mid-2000s because global economies have entered a period of low growth,” said Shin Hyeon-su, a research fellow at the institute.

During 1995-96 when the world economy was growing rapidly, Korean exports jumped 13.8 percent despite a weak yen trend that was stronger than a weak won trend. Yen traded at 123 per dollar in February 1997, up 47.2 percent from 83.6 recorded in April 1995; the won traded at 866.9 against greenback in February 1997, up 12.9 percent from 767.5 in April 1995.

When a strong won trend prevailed over a weak yen trend from 2004-7, Korean exports increased an average of 18.7 percent per year against average annual world economic growth of 5.1 percent.

During the powerful weak yen trend last year, Korean exports dipped 2 percent as world economies grew at a tepid 3.3 percent annual rate.

The institute raised concerns that the weak yen’s impact on Korean exporters may be greater this time around as they face a double whammy of low global demand coupled with lower prices of Japanese goods.

“Korean companies must come up with strategies to achieve sophistication of the export structure and remap competitiveness for increasing exports to Japan,” Shin said. “They also need to find ways to restore price competitiveness by utilizing free trade agreements.”

Meanwhile, the won sank to its weakest level in almost six months as overseas investors cut their holdings of domestic stocks amid concern over a proposed one-time tax on bank deposits in Cyprus.

Cypriot President Nicos Anastasiades bowed to demands by euro zone finance ministers to raise 5.8 billion euros ($7.5 billion).

The won fell at 1,114.60 per dollar. Meanwhile, won finished at 1,179.47 won against yen yesterday, from 1,154.76 won recorded on Friday.

By Kim Mi-ju, Bloomberg [mijukim@joongang.co.kr]