The coming currency war

Korea’s current account surplus this year is expected to exceed Japan’s for the first time, with $63 billion against $60.1 billion. The remarkable reversal looks like good news as it is a reflection of the two countries’ economic performances. Despite a rough global economy, Korea’s main export items like mobile phones, automobiles and semiconductors are selling well overseas. Thanks to that, our monthly exports surpassed $50 billion in September for the first time, with the current account surplus continuing for 20 months in a row. Korea has indeed outperformed Japan, a country that has an economy five times bigger than ours and which has been a trade surplus nation for decades.

However, we must confront an inconvenient truth behind the outstanding performance of our economy: The laudable achievement was made possible more by Japan’s domestic problems than our own merits. Japan’s underperformance stems from its rapidly increasing energy imports after the nuclear disaster at Fukushima and the shutdown of nuclear power plants across the country. Moreover, the steep devaluation of the yen against the U.S. dollar - as much as 40 percent - contributed to the deterioration of Japan’s capital accounts balance.

Another lesson we should keep in mind is that a country’s industries can rarely recover their past glories once they have lost their international competitiveness. Exports by Sony and Panasonic, once icons of Japan’s power as consumer goods producers and exporters, are struggling despite the benefits they enjoy from the depreciation of the yen.

A bigger problem for us is the external pressure for devaluation of our currency. The U.S. Treasury and the International Monetary Fund have begun building pressure on Korea, Germany, China and Japan to lower their currencies’ exchange rates. Compared to Germany, which already uses the euro, and Japan, which was allowed by the United States to push ahead with Abenomics, and China, which has been steadfastly sticking to its own exchange rate policy, our economy is more vulnerable to the pressure.

Moreover, if the U.S. government ends or tapers its quantitative easing, it could cause a massive outflow of foreign capital from our market, which could lead to a fluctuation of the value of the won. We must fight against the mounting pressure to depreciate our currency, and we must increase our foreign reserves. Most of all, the government should strengthen the fundamentals of our economy and reinforce the international competitiveness of our products. Only then can our economy survive a war over exchange rates.