Currency counterattack

As the Japanese yen’s value against the Korean won fell below the 900 won ($0.84) mark for the first time in seven years and two months, the government failed to hold the line. The yen shock could take a toll on the Korean economy. It could accelerate a slowdown, and the country’s economic growth could slip below 3 percent this year.

This weakening trend of the yen is different from the past. First of all, the slide is too fast. The currency has depreciated since the Shinzo Abe administration launched an ambitious monetary campaign to end the national deflationary cycle by flooding the economy with liquidity and devaluing the yen to boost exports. Since the unlimited monetary easing took off in June 2012, the yen has been depreciated by 68 percent. Korean companies that compete directly with Japanese rivals in mainstream export items like automobile and petrochemicals were hard hit. Exports in the first quarter fell 2.8 percent from the same period a year ago largely due to the weak yen.

Second, the yen’s weakening has been intentionally and artificially driven by the Japanese government. It went on a limitless money-printing binge despite criticism to the apparent beggar-thy-neighbor foreign exchange policy. Revival of Japanese exports comes at expense of reduced shipments by Korea.

Third, the yen is now decisively southbound following the downgrade of Japan’s national credit rating. Yet the Japanese central bank shows no signs of interrupting its quantitative easing. At the current rate, the yen would sink below 800 won next year.

Some say companies should no longer blame exchange rate for slow business and instead focus on strengthening competitiveness in quality, services and innovation. But excessive foreign exchange volatility demands emergency action. The yen factor will affect not just exporters and industry, but the entire economy across the board, including tourism and consumption.

The Bank of Korea and financial authorities should stop saying they have few policy options to defend the won and seriously consider their own set of aggressive monetary actions. An additional rate cut and other options must be discussed. There is no time to dither. The actions will be of little help if the yen bomb has wreaked havoc on the economy.

JoongAng Ilbo, April 30, Page 34