BOJ hikes rates, sparking optimism for Korean exports

Bank of Japan Governor Kazuo Ueda attends a press conference after a policy meeting at BOJ headquarters in Tokyo on December 19, 2023. [REUTERS/ Yonhap]

The Bank of Japan (BOJ) hiked its interest rate for the first time in 17 years on Tuesday, ending a streak of negative rates after decades of deflation.

The central bank raised its short-term interest rates to a range of 0 to 0.1 percent from minus 0.1 percent, dropping the negative interest rates that had been in place since 2016 in efforts to stimulate the economy.

Analysts expect the BOJ's historic decision to strengthen the yen and raise the price competitiveness of Korea's products, making its stocks more appealing to foreign investors and boosting its exports.

The country’s ultralow interest rate has long contributed to the profits of export-heavy companies like Toyota whose products became cheaper for overseas consumers. That benefit may wane and make some Korean products comparatively more appealing on the global stage.

“The automobile and shipbuilding industries are expected to benefit from the rise of the BOJ’s interest rate as it will strengthen the yen against the won, pushing up the price competitiveness of Korean products and ultimately corporate profits,” said Huh Jae-hwan, an analyst at Eugene Investment & Securities. “Korea and Japan compete in internal combustion vehicles and liquefied natural gas carriers.”

Such an impact, however, has not been seen yet.

The Kospi slid 1.10 percent, and the Kosdaq fell 0.29 percent on Tuesday. Hyundai Motor and Kia fell 2.06 percent and 7.11 percent, respectively, while major shipbuilder Hanwha Ocean dropped 3.09 percent.

Won traded at 890.95 against 100 yen from 894.68 the previous day.

The impact on semiconductors, Korea’s largest export that is currently experiencing a recovery, is not expected to be major.

“Korea and Japan compete in the international market for memory chips, but they are often traded in dollars,” said Kim Yang-paeng, senior research specialist at Korea Institute for Industrial Economics & Trade. “So stronger yen will only cut the profitability of Japanese chipmakers instead of losing price competitiveness.”

But Kim added that Korea will benefit when importing Japan’s system semiconductors, for which it outranks Korea, as the strengthened yen, compared to the won, will reduce import prices.

A higher lending rate isn’t expected to negatively impact Japanese stocks directly. But the country's record rally this year, which saw the market reach its highest levels since 1989, coupled with foreign investors' previous behavior indicates that they may lose steam.

“Korea is not a proxy market for Japan, as foreign investors tend to invest in Japan, China and Korea in that order, but the investors tended to buy Kospi stocks when the yen appreciated,” Huh added. “However, Japan’s interest rates will need to be raised more times for Korea’s exports and stock market to benefit from the latest BOJ decision.”

“Japan is not expected to return to cutting rates” any time soon, added Lee Jeong-hwan, an associate professor at Hanyang University’s College of Economics and Finance. “So it will be a matter of how slowly it lifts the rates.”

The Federal Open Market Committee is scheduled to announce its rate decision on Wednesday. Indications of cuts, which will reduce the rate differentials between Japan and the United States, will ease the impacts of the BOJ’s Tuesday decision.

BY JIN MIN-JI [jin.minji@joongang.co.kr]