Fighting against a cheaper yenThe scares of a cheap yen have become reality. The U.S. dollar broke above the psychological threshold of 100 yen in Tokyo for the first time in more than four years after a recent meeting of the Group of 7 finance ministers indicated support for Japan’s ultra-loose monetary policy to revive its lethargic economy. The last time the greenback hovered so high was in April 2009.
Tokyo government authorities assessed so-called “Abenomics,” an aggressive policy mix of fiscal and monetary stimuli pursued by the cabinet of Prime Minister Shinzo Abe, as beginning to prove effective. Market participants are betting the dollar could soar to 110 yen as the current trend continues.
The cheaper yen is a boon to Japan’s manufacturers and exporters and a nightmare to rival Korean companies and our export-reliant economy. If exports slip further while local demand remains sluggish, the economy won’t be able to pull out of the slowdown in the second half as hoped. As expected, stocks tumbled, quickly wiping out the gains from the Bank of Korea’s benchmark rate cut last week.
The problem is that the Korean government has few policy options to fight Japan’s aggressive monetary easing. The Japanese government’s currency policy gained tacit approval from the G-7 group as part of the country’s all-out measures to kick-start and inflate the depressed economy. It is now out of the question for the Korean government to seek international cooperation to reverse the trend.
Yet the government cannot afford to join the money flooding and currency war because its interventionist efforts can do more harm than good in a small foreign exchange market like ours. Even if the government makes a move in that direction, we would only end up earning a bad reputation as a currency manipulator. Authorities cannot go beyond mere smoothing to prevent sharp volatility. Exporters can no longer depend on government authorities to fight at the currency front line for their sake.
The yen’s weakening will likely continue for now. A fundamental solution to fight the alarming trend is to change and strengthen Korean economic fundamentals and build resilience against competition from the cheaper yen. Also, the economy must become less reliant on exports by enlarging domestic demand through industrial restructuring and corporate competence.
The government must concentrate on revitalizing domestic demand while fending off sharp foreign exchange volatility. Companies should also endeavor to raise their productivity and develop new products to stay competitive on the global stage.