Government calls for action on yen

Korea’s finance minister and deputy prime minister for economy, Hyun Oh-seok, urged international cooperation to tackle a “weak yen problem” and said that Group of 20 nations should revisit the issue.

“Japan’s expansionary policies are having various ripple effects on many countries,” Hyun told reporters Saturday in Bundang, Gyeonggi, on his second day as finance chief. “The yen is depreciating while the won is gaining, and this is flashing a red light for Korea’s exports.”

Japan’s new central bank governor, Haruhiko Kuroda, is poised to boost monetary easing as part of a campaign against deflation, which has already driven down the yen by about 11 percent against the dollar in the past three months. Hyun’s comments revive concerns that his nation aired before and after last month’s G-20 meeting in Moscow, where that organization refrained from criticizing Japanese policies.

“While we will do what we can, we need international cooperation to deal with the weak yen problem,” Hyun told reporters Saturday. “This should be discussed at the G-20.”

Korean officials are concerned about the yen’s slide because the nation depends on exports for economic growth and competes in overseas markets with Japanese manufacturers of cars and electronics.

At the Moscow meeting, G-20 nations pledged not “to target our exchange rates for competitive purposes,” without any censure of Japan for the yen’s decline.

Japan’s government says it is not targeting the yen, with declines in the currency a side effect of efforts to end deflation and spur a sustained recovery in the world’s third-largest economy.

Hyun made his comments as he toured markets in Seoul and Bundang in Gyeonggi, checking on prices of goods after the new government under President Park Geun-hye pledged to help low-income earners.

Appointed by Park on March 22, Hyun pledged in his inaugural speech to use “all possible measures to speed up the economic recovery” and indicated that government support would come as early as this month.

“We need to factor in the yen problem as we think about policy measures, as exports and domestic demand are two big pillars of our economy,” Hyun said. Stabilizing foreign exchange markets should always be an important part of government policy since currency flows can be a source of shocks, he added.

At the same time, though, the won has weakened against the dollar, at least temporarily. It declined 0.7 percent in the past week to 1,119.28 per dollar, according to data compiled by Bloomberg.

This should ease the pain of Korean IT and auto exporters that suffer from the weak yen, according to a recent report by KB Investment and Securities.

The local brokerage firm said that if the Korean won weakens against the greenback by 10 won, earnings in the IT and auto sectors will grow 1.8 percent and 1.4 percent before taxes respectively.

Under the premise that the won-dollar exchange rate depreciates to 1,080 won from 1,070 won, for example, the IT and auto sectors will rake in an additional 1 trillion won this year.

Under this scenario, KB Investment and Securities said the IT sector’s operating profit would reach 39.1 trillion won, up from 703 billion won.

It estimated that Samsung Electronics, the country’s biggest market cap company that controls the largest pie of overall earnings in the IT sector, would see its earnings go up by 386 billion won to 28.6 trillion won should the won dip to 1,080 won from 1,070 won per dollar.

In the automobile sector, the brokerage firm estimated that Hyundai Motor, the country’s second-largest market cap company, would see earnings jump by 1.2 percent.

However, other industries including utilities, construction, refined oil, airline, chemical and telecommunications would see their earnings cut as the dollar rises.

KB Investment and Securities estimated that earnings of utilities companies would fall 5.9 percent, the largest drop, whereas telecommunication and construction companies would see the smallest drop at about 0.2 percent.

“The trend of a weakening yen evolved quickly since fourth quarter of last year, but we’ve seen the trend shifting to a strengthening dollar starting in February,” said Kim Seong-no, an analyst at KB Investment and Securities. “The shift is caused by a sharp jump in yields for U.S. government bonds which have broadened their interest spread. In the short term, a weaker won triggered by a strong dollar will bring positive effects to exporters. Shares of the once undervalued Korean IT and automobile sectors will rise and this is likely to positively impact the overall stock market.”

Shares of companies engaged in the two industries have maintained an upward trend since the end of January.

Samsung Electronics shares closed at 1,455,000 won on Friday, up 0.48 percent from the Jan. 31 record of 1,448,000 won. Hyundai Motor’s shares gained 4.6 percent to 215,500 won during the same period.

“Earnings estimates for the IT and automobile sectors could be revised higher depending on whether the dollar strengthens against the won by 10 won,” Kim said. “We estimate the average won-dollar exchange rate to be between 1,082 won and 1,085 won in the first quarter.”

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