Economists see minimal impact from Japan cut

By Cynthia J. Kim
The Korean economy faces minimal impact from Japan’s sovereign credit rating cut by Moody’s Investors Service as the deteriorating fiscal conditions had already been factored in the market, economists said Wednesday.
Local experts pointed out that the rating is unlikely to weaken the yen against the won which would continue benefiting Korean exporters.
“The yen stands at a very strong level against the U.S. dollar and Japanese authorities are rolling out new measures to weaken it. This is a good thing for Korean exporters selling competing products with their Japanese rivals,” a dealer said.
The yen’s weakening could potentially crimp local exporters by decreasing competitiveness of Korean goods abroad. Korea’s IT, chemical, shipbuilding and car industries have enjoyed increasing market share in the global market for the past few years as yen had stayed relatively high against the won.
Moody’s downgraded Japan’s government debt by one notch to ‘Aa3,’ citing the country’s large budget deficits and debt accumulated since the 2009 financial recession. Japan was warned about a possible downgrade back in May due to renewed concerns about its growth prospects and public debt of almost twice its gross domestic product. But economists said the news is unlikely to be a surprise to investors in the market.
“The downgrade was pretty much priced in. And traders are much more worried about debt woes in Europe and the U.S., so the impact of Japan’s rating cut should be short-lived,” Ju Lee-hwan, an economist at Eugene Securities said.
“The downgrade is unlikely to weaken the yen against a number of major trading currencies. I don’t expect yen carry traders to withdraw from markets elsewhere and cause a credit crunch,” Ju added.
The yen carry trade refers to borrowing at low interest rates in yen and using the loan to invest in higher yielding assets elsewhere, including Korea where benchmark interest rate sits much higher at 3.25 percent.
Japanese investments account for a negligible portion of domestic bonds and stocks. Japanese hold 5.6 trillion won of Seoul stocks and 780 billion won of local bonds, Financial Services Commission said.
The benchmark KOSPI gained 1.23 percent and closed at 1,754.78. The won traded slightly lower against the yen, losing 8.05 won to close at 1,412.06.
(cynthiak@heraldcorp.com)