Caught in the yen current

The big threat to South Korea's economy is not from the North but from the ripples caused by the falling currency across the Sea of Japan

PUBLISHED : Saturday, 20 April, 2013, 12:00am
UPDATED : Saturday, 20 April, 2013, 5:44am

South Korean Finance Minister Hyun Oh-seok said Japan's weakening yen was hurting his country's economy more than North Korean threats, an example of a "spillover" that merits discussion.

"Japan's economic policies are doing their part to help the world economy recover," Hyun said on Thursday in Washington before a meeting of Group of 20 finance chiefs.

"But if this causes problems, and then the problems cause new responses from partnering nations, for example a currency war, the world economy will have a hard time."

In his first month in the job, Hyun has been contending with a slide in Japan's currency that is undermining South Korean exports, and tensions with North Korea that threaten to dampen confidence. The won has gained more than 21 per cent against the yen in the past six months on Japanese Prime Minister Shinzo Abe's campaign for expanded monetary easing.

"Compared to the North Korea risk, a sliding yen is having a considerable impact on the real economy of South Korea," Hyun said. "Depreciation of the yen has caused the spillover-effect phenomenon so this is worth discussing."

At their last gathering in February, G20 finance chiefs signalled that Japan could stimulate its stagnant economy as long as policymakers refrained from publicly advocating lower levels for the yen. The G20 nations will affirm a commitment to avoid weakening their currencies to gain a trade advantage, according to a draft statement prepared for the meeting this week in Washington, Bloomberg reported. Bank of Japan governor Haruhiko Kuroda said on Thursday in Washington that other nations understood that the BOJ's easing was aimed at spurring inflation rather than weakening the yen.

"South Korea's exports may decline in the second half of this year unless the US economy rebounds significantly, which is unclear for now," said Lee Sang-jae, a Seoul-based economist at Hyundai Securities. "South Korea wants the G20 to help curb or at least slow the yen's declines. However, Japan is trying its last resort and big powers such as the US and Germany see little reason to put a brake on Japan."

The finance minister said that recent movements in stocks, currencies and credit default swap premiums are "impacted by North Korea's provocations", while other events, including the Cyprus financial crisis, also have an effect. Still, it's "really difficult to see North Korea and the yen depreciation as the same level of risk", he said. "North Korea is not having a big impact on the real economy."

North Korea fired a long-range missile in December and carried out a nuclear weapons test in February in defiance of tightened United Nations sanctions. Kim Jong-un's regime has threatened pre-emptive nuclear strikes against its enemies and last week pulled its workers from an industrial complex operated jointly with the South.

In March, Hyun said the yen's weakness was "flashing a red light" for Korea's exports, which account for about half of Asia's fourth-largest economy. Samsung Electronics said in January that currency moves could cut its operating profit by three trillion won (HK$20.7 billion) this year.

"My thought for now is that if the global economy retains the pace of recovery in the second half, we may be able to make the initial exports estimate, despite the yen," Hyun said. The ministry earlier forecast 4.3 per cent export growth this year. South Korea's government is seeking to get the nation closer to a potential growth rate estimated by central bank governor Kim Choong-soo at 3.8 per cent, after last year's 2 per cent expansion that was the weakest since 2009. In the fourth quarter of last year, the economy grew 0.3 per cent from the previous three months.

Elevated household debt is constraining consumption, while the central bank cited the Japanese currency and weakness in the global economy when it cut this year's growth forecast to 2.6 per cent from 2.8 per cent last week. The finance ministry estimates a 2.3 per cent expansion.

The single biggest risk in the world economy was lack of leadership in policy co-ordination as regions recovered at different speeds, Hyun said, citing limited momentum in the European Union compared with gains in the US and emerging nations and signs of a comeback in Japan. After South Korea's central bank last week resisted pressure to cut interest rates, Hyun's finance ministry this week announced extra spending that it said could boost growth by 0.3 percentage points and create 40,000 jobs.

Asked about the relationship between the government and the central bank, Hyun said: "The Bank of Korea is really retaining its independence well - to the extent that some say it's too independent." At the same time, the government and the bank are "heading in the same direction", as shown by the central bank's decision to cut lending rates on a programme that supports borrowing by small businesses, Hyun said.

Hyun, who at 62 is three years younger than Bank of Korea governor Kim, followed a similar academic and career path. They went to the same schools - Kyunggi High School and Seoul National University, and then both completed doctorates in economics at the University of Pennsylvania. Both also headed the nation's biggest state-run research centre, the Korea Development Institute, which was founded by former dictator Park Chung-hee, father of President Park Geun-hye. As the institute's president, Hyun advised Kim on policy until Hyun became deputy prime minister and finance minister in March under Park.