Won, Kospi damaged by weakening yen

The electronic board at the Korea Exchange Bank in downtown Seoul shows the Kospi closing below 2,000 for the first time in two months.[NEWS1]

Stark differences in monetary policy directions of major economies caused Korea’s currency to sharply depreciate and its securities market to tumble yesterday, a sign that the country’s economic recovery is not going smoothly.

The country’s main bourse Kospi plunged below the 2,000 mark for the first time since July 14.

The Kospi closed at 1,991.54, down 1.41 percent from the previous day, as foreign investors sold approximately 207 billion won ($194.6 million) worth of local shares, largely because of currency woes that stemmed from the strengthening U.S. dollar and weakening Japanese yen.

According to Bloomberg, the yen’s value against the U.S. dollar surpassed 110, its weakest since Aug. 25, 2008.

The yen traded at 960 won on the Seoul foreign currency market. It was about 1,070 won in February, but dropped by more than 100 won over the past six months.

“A major reason for the strengthening of the dollar and weakening yen is the difference between the two countries’ monetary policies,” said Lee Seung-hoon, a research fellow at Samsung Securities. “While the U.S. is tightening its monetary policy, Japan is still printing money.”

As concerns mounted over a stronger dollar and weakening yen, the Kospi opened 0.33 percent lower and couldn’t stay above the 2,000 barrier.

Influenced by major currencies, the Korean won’s value plunged 7.45 won to 1,062.65 won against the dollar yesterday. It is the first time the won’s value has fallen below 1,060 since March.

“The currency exchange rate reflects the power of the economy,” said Lee Chang-mok, head of the research center at Woori Investment & Securities. “The U.S. dollar is forecast to keep rising as the American economy is leading the global recovery.”

“It is natural to see the dollar appreciate after ending the six-year stimulus plan,” said So Jae-yong, a research fellow at Hana Daetoo Securities.

A key reason for the Kospi’s plunge is that the low yen affects Korean businesses’ performances overseas. Korean manufacturers compete against Japanese rivals abroad, so the low yen is an advantage for Japanese companies in terms of price.

Since the inauguration of Finance Minister Choi Kyung-hwan’s economic team on July 16, the Kospi has rallied by more than 3 percent, hitting a high of 2,082.61 on July 30, largely thanks to high expectations of an economic recovery as Choi has hinted at aggressive fiscal measures.

The minister announced a 41 trillion won package to stimulate the sagging economy a week after his inauguration.

The package included expansionary measures using public funds, relaxed loan-to-value (LTV) and debt-to-income (DTI) ratios to revive the real estate market, and a plan to increase household income by imposing new taxes on corporations.

Instead of making a supplementary budget for this year, Choi devised the biggest-ever budget for next year of 376 trillion won, which is 5.7 percent more than this year’s.

In line with the government’s economic plan, the Bank of Korea (BOK) shaved the benchmark interest rate 0.25 percentage point to 2.25 percent on Aug. 14, the first cut in 15 months.

Initially, the market reacted positively to the government’s aggressive moves, as reflected in the Kospi.

However, questions were raised over the past three months regarding the effectiveness of the measures, and foreign investors started selling local shares last month.

The exit of foreign capital is forecast to continue as the U.S. Federal Reserve is set to end its quantitative easing by the end of the month. There are speculations about early interest rate hikes in the United States, too, stimulating investors’ appetites. Those who have invested in emerging markets including Korea might turn to the United States for higher interest rates.

“Our institution’s growth forecast is 3.6 percent this year,” said Huh Jae-hwan, a research fellow at KDB Daewoo Securities. “And there will not be much difference next year. Choinomics measures are not enough to offset all the negative external conditions to the economy.”

Meanwhile, the Korean government is putting pressure on the central bank to further cut the key rate to help boost consumption and investment.

According to Statistics Korea yesterday, consumer prices grew 1.1 percent in August from a year earlier and have stayed below 2 percent for the past 23 months. The low price growth has led to worries about an extended period of disinflation, which Choi also said he was concerned about.

“As the low inflation period is expected to continue, the central bank should take preemptive action,” said a monetary policy committee member. “A subsequent interest rate cut will be effective.”

BOK Governor Lee Ju-yeol hasn’t yet mentioned the possibility of another rate cut, keeping a careful stance.

BY SONG SU-HYUN [ssh@joongang.co.kr]