Transaction-fee talk puts the brakes on won’s riseThreats by South Korea to institute a tax on foreign-exchange transactions may finally be starting to curb the won’s appreciation after it rose to the highest level versus the yen since 2008 and cooled economic growth.
The won fell in March against the yen after climbing 23 percent for seven straight months through February, the longest rally since 2005, as Japanese Prime Minister Shinzo Abe called for more monetary easing to end deflation. Strategists are starting to temper their calls for the won to appreciate, data compiled by Bloomberg show.
South Korea’s economic prospects took a turn for the worse as the won appreciated, causing exports to rise less than analysts’ forecast last month. The currency’s gains were making Hyundai Motor cars and LG Electronics televisions more expensive relative to Japanese rivals. Eun Sung-soo, director general at Korea’s Finance Ministry, said on March 20 that the nation will consider measures to stem inflows if needed while “various” financial taxes will be studied.
“The currency issue is the Achilles’ heel of the Korean economy when it comes to Japan,” Oh Suk-tae, head of research at Standard Chartered First Bank in Seoul, said. “Media and lawmakers are asking the government to use the tax as a means to fight against Abe’s policies, but we have to think whether to use it as a wild card now.”
Asia’s fourth-largest economy expanded 1.5 percent in the fourth quarter, the slowest pace since the 2009 global recession, and economists are cutting their 2013 growth forecasts at the fastest pace in eight months amid concern a stronger won is hurting South Korea’s exports. Shipments increased 0.4 percent in March from a year earlier, less than the median estimate of a 1.8 percent gain in a Bloomberg survey.
Gross domestic product will climb 2.8 percent in 2013, according to the median estimate in a monthly Bloomberg survey. The March projection compares with 3.25 percent forecast in February. The 0.45 percentage point drop was the biggest since July’s poll.
Strategists see the won gaining 6.5 percent to 1,045 by the end of the year, which is 1.6 percent weaker than they were forecasting at the end of January.
International investors sold a net 2.6 trillion won ($2.3 billion) of Kospi index shares last month, the most since they dumped 3.7 trillion won in May.
South Korea’s main opposition Democratic United Party proposed a foreign-exchange transaction bill in November that would levy a tax of as much as 30 percent when the currency fluctuates more than 3 percent a day, while applying a 0.02 percent rate in times of smaller swings.
The proposed Spahn Tax, named after German professor Paul Bernd Spahn, would likely weaken the exchange rate by at least 50 won per dollar, Standard Chartered’s Oh said. No country has adopted the method.
Spahn worked with organizations such as the International Monetary Fund, World Bank, United Nations, European Commission and Council of Europe. In his analysis about 20 years ago, Spahn concluded that the initial concept of a transaction tax specific to currencies, proposed by James Tobin in the 1970s, wasn’t viable and suggested an alternative solution to the problem of managing the volatility.
The Bank of Japan’s loose monetary policy aimed at ending the nation’s persistent deflation has driven a 16 percent plunge in the yen versus the dollar in the past six months. Governor Haruhiko Kuroda said last month the central bank may scrap a rule limiting the scale of asset buying and scoop up longer-maturity bonds to reach a 2 percent annual inflation target it adopted at the urging of Prime Minister Abe.
Kia Motors Vice President Lee Soon-nam said that the depreciation of the yen is becoming a “weapon” for his Japanese rivals. Hyundai Chief Financial Officer Lee Won-hee said a falling currency allows Japanese automakers to aggressively market in regions where the Korean carmakers compete, such as Australia and Russia.
“It is still uncertain if South Korea will actually impose any controls, but we can’t rule out such a possibility,” said Takahide Irimura, the Tokyo-based head of emerging-market research at Kokusai Asset Management, which runs Japan’s biggest mutual fund.
Finance Minister Hyun Oh-seok called on the Group of 20 nations last month to address “the weak-yen problem” and said stabilizing exchange rates should be an important part of government policy. Hyun said the yen’s drop versus the won was “flashing a red light” for exporters in Asia’s fourth-largest economy. He said the impact will be monitored “at all times.”
Interbank currency transactions in South Korea’s spot market averaged $3.6 trillion in the last three years, Min Byung-doo, the DUP lawmaker and lead sponsor of the transaction-tax bill, said in February. The levy may exempt transactions linked to “real demand” from exporters, importers or those studying overseas, Min’s office said.
“The Korean government needs to take countermeasures as Japan’s monetary stimulus continues to weaken the yen,” said Lee Chang-seon, an economist at LG Economic Research Institute. “A level near 1,050 won per dollar could prompt the government to seriously consider adopting the transaction tax that will dull speculative inflows and the won’s appreciation.”
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