Minister says yen is worse than North

Finance Minister Hyun Oh-seok, second from right, and IMF chief Christine Lagarde, second from left, hold a meeting in Washington, where a Group of 20 meeting is being held. Provided by the Finance Ministry

Finance Minister Hyun Oh-seok said Japan’s weakening yen is hurting his country’s economy more than North Korean threats, an example of a “spillover” that merits discussion.

“Japan’s economic policies are doing their part to help the world economy recover,” Hyun said Thursday in an interview in Washington before a meeting of Group of 20 finance chiefs. “But if this causes problems, and then the problems cause new responses from partnering nations, for example a currency war, the world economy will have a hard time.”

In his first month in the job, Hyun, 62, has been contending with a slide in Japan’s currency that is undermining South Korean exports, and tensions with North Korea that threaten to dampen confidence.

The won has gained more than 21 percent against the yen in the past six months on Japanese Prime Minister Shinzo Abe’s campaign for expanded monetary easing.

“Compared to the North Korea risk, a sliding yen is having a considerable impact on the real economy of South Korea,” Hyun said in the interview.

“Depreciation of the yen has caused the spillover-effect phenomenon so this is worth discussing.”

At their last gathering in February, G-20 finance chiefs signaled that Japan could stimulate its stagnant economy as long as policy makers refrain from publicly advocating lower levels for the yen.

Lagarde, Lew

In a statement separate from the interview, Hyun said he told Christine Lagarde, the head of the International Monetary Fund, of South Korea’s concern that Japan’s policies are hurting the export competitiveness of other nations. He said he told U.S. Treasury Secretary Jacob J. Lew that stimulus measures aiding global growth can have negative spillovers.

The G-20 nations will affirm a commitment to avoid weakening their currencies to gain a trade advantage, according to a draft statement, Bloomberg BNA reported. Japanese Finance Minister Taro Aso said that Japan’s policies went unopposed at a G-20 meeting in Washington Thursday.

“South Korea’s exports may decline in the second half of this year unless the U.S. economy rebounds significantly, which is unclear for now,” said Lee Sang-jae, economist at Hyundai Securities. “South Korea wants the G-20 to help curb or at least slow the yen’s declines. However Japan is trying its last resort and big powers such as the U.S. and Germany see little reason to put a brake on Japan.”

North’s Provocations

In the interview, the finance minister said that recent movements in stocks, currencies and credit default swap premiums are “impacted by North Korea’s provocations,” while other events, including the Cyprus financial crisis, also have an effect.

Still, it’s “really difficult to see North Korea and the yen depreciation as the same level of risk,” he said. “North Korea is not having a big impact on the real economy.”

North Korea fired a long-range missile in December and carried out a nuclear weapons test in February in defiance of tightened United Nations sanctions. Kim Jong-un’s regime has threatened pre-emptive nuclear strikes against its enemies and last week pulled its workers from an industrial complex operated jointly with the South.

Red light

In March, Hyun said the yen’s weakness was “flashing a red light” for Korea’s exports, which account for about half of Asia’s fourth-largest economy. Samsung Electronics said in January that currency moves could reduce its operating profit by 3 trillion won ($2.7 billion) this year.

“My thought for now is that if the global economy retains the pace of recovery in the second half, we may be able to make the initial exports estimate, despite the yen,” Hyun said. The ministry earlier forecast 4.3 percent export growth this year.

South Korea wants to get closer to a potential growth rate estimated by central bank Governor Kim Choong-soo at 3.8 percent, after last year’s 2 percent expansion was the weakest since 2009. In the fourth quarter of last year, the economy grew 0.3 percent from the previous three months.

Elevated household debt is constraining consumption, while the central bank cited the Japanese currency and weakness in the global economy when it cut this year’s growth forecast to 2.6 percent from 2.8 percent last week. The finance ministry estimates a 2.3 percent expansion.

The single biggest risk in the world economy is lack of leadership in policy coordination as regions recover at different speeds, Hyun said, citing limited momentum in the European Union compared with gains in the U.S. and emerging nations and signs of a comeback in Japan.

Central bank

After South Korea’s central bank last week resisted pressure to cut interest rates, Hyun’s finance ministry this week announced extra spending that it said could boost growth by 0.3 percentage points and create 40,000 jobs.

Asked about the relationship between the government and the central bank, Hyun said: “The Bank of Korea is really retaining its independence well - to the extent that some say it’s too independent.” At the same time, the government and the BOK are “heading in the same direction,” as shown by the central bank’s decision to cut lending rates on a program that supports borrowing by small businesses, Hyun said.

Hyun, who is three years younger than Bank of Korea Governor Kim, followed a similar academic and career path.

Bloomberg