Revenge of the yen

In her New Year’s address, President Park Geun-hye pledged to accelerate her goal of achieving per capita income of $40,000 for the country. The government is hoping for economic growth of 3.9 percent for 2014, which will outperform the country’s growth performance in the mid-3 percent range for the first time in many years.

But the action in the financial markets is splashing ice water on the government’s optimistic outlook. The benchmark Korean composite stock index lost 65 basis points over the first trading days of 2014 to sink below 1,950. The Japanese yen is hovering at a five-year low against the Korean currency, dipping below the marginal 10 won threshold.

Authorities and markets have been mostly concerned about America’s winding down of its monetary stimulus program and a possible economic slowdown in China. Those worries faded, and what appears to be far more important and scary is the won’s appreciation and its negative impact on Korean exports and the profit margins of our exporters. Prime Minister Shinzo Abe’s bold economic policies to end Japan’s deflationary cycle through radical monetary and fiscal easing, a weaker currency and structural reforms are taking a toll on rival exporting countries in the region.

The Seoul government is predicting export growth of 6.4 percent this year with some pretty solid signs of recovery in global demand. But the steep opposite direction of the currencies of the region’s major exporting rivals could dent that outlook. Apart from Samsung Electronics, 90 large exporters expect their operating profits to drop 12 percent this year from last year.

Abenomics, which includes the central bank’s heavy bond-purchasing program to help weaken the currency and boost exports, will continue to reflate Asia’s second-largest economy but at the expense of neighboring countries. Abenomics - despite a beggar-thy-neighbor element that could catalyze a currency war in the region - received endorsement from the United States in the G-20 meeting. Abe’s uncanny popularity also means his policy won’t be questioned or challenged at home.

The United States keeps trying to reaffirm its “pivot” to Asia and steer away from the quagmires of Afghanistan, Iraq and the Middle East in general. But its devastated finances won’t allow Washington to make new investments and commitments in the region to maintain its predominance against a rising China. It has appointed Japan to play the ringleader to help defend U.S. influence and contain China. In return, Washington would tolerate Tokyo’s outright depreciation of the yen - which could be called currency manipulation - and its military revival through the exercise of its right to so-called collective self-defense.

The U.S. Fed’s unwinding of its quantitative easing program, which has kept the dollar weak over the last five years, also accelerates the yen’s slide. The dollar is expected to break 110 yen this year. The Korean won is gaining from a strong current account that has been reaping surpluses for 22 months in a row.

In his recent book “The Korean Economy in a Trap,” Kim Dae-ki, who served as the senior secretary for economic affairs for former President Lee Myung-bak, said Korea has long benefited from the strong yen. Korean exporters made profits at the expense of Japanese competitors that suffered under a strong currency. Korean exporters believed they were lucky, when in fact the success of Korea’s industrial productivity can be attributed to outside factors.

The situation is now reversed, but the government can’t fight back with the same weapon. Domestic public opinion is also against any government action to support large exporters. Rhee Chang-yong, the Asia-Pacific head of the International Monetary Fund, advised Seoul last year to stop blaming the yen. Korea must learn how Japanese companies managed to survive with a strong yen over the last two decades, he said.

The revenge of the yen is taking a heavy toll on Korean exporters. Korean steel, electronic appliances and machinery are now more expensive than Japanese products in Southeast Asian markets. The strong won is also dampening corporate investment sentiment. Companies are deferring investment at home and turning to cheaper markets like China and Vietnam. Chairmen of major conglomerates didn’t even mention new investment or hiring in their New Year’s addresses. Instead, they predicted hard times.

“It is hard to make any predictions,” said Samsung Group Chairman Lee Kun-hee, and LG Group Chairman Koo Bon-moo emphasized the need for a crisis mentality.

Japan has no plan to adjust its relentless stimuli and currency campaign. Bank of Japan Governor Haruhiko Kuroda rejected views that the yen’s weakness is excessive. He said the country can afford to keep up with heavy quantitative easing for at least two years without creating bubbles in asset prices. Does Seoul have any counter strategy? So far, the economic focus of President Park dissipated among ambiguous rhetoric about a creative economy, economic democratization and building a Korean-style welfare state. None of those policies counters Abenomics. The frontline numbers - exchange rates and stock prices - already show fluctuations.

The strength of Abenomics is its focus. It has no limit in how far it will go to revive the economy. Geun-hye-nomics is a laundry list of wonderful sentiments. In economics, what satisfies everybody is the worst policy. There is also a wise saying that good campaign promises make bad policy and bad campaign promises make good policies. The president’s promises of economic democratization and balanced growth may be too extravagant for reality, all Santa Clause and lollipops. The government needs a specific and concentrated strategy to defen
d the country against the yen’s revenge.

*The author is a senior editorial writer of the JoongAng Ilbo.

by Lee Chul-ho