[Editorial] Risks from ‘Abenomics’

Korean exporters will have to brace for stronger competition from their Japanese rivals down the road as Japan’s incoming Prime Minister Shinzo Abe is determined to devalue the yen to reignite the economy.

Abe’s Liberal Democratic Party swept to victory in elections for the lower house held on Sunday by selling a set of economic policies dubbed “Abenomics.”

The new prime minister is pressing the Bank of Japan to print more money to further ease its already loose monetary policy and raise its inflation target from the current 1 percent to 2 percent.

Pledging to increase fiscal spending on infrastructure projects, the ultra-conservative leader also seeks to push down the value of the yen to enhance the competitiveness of struggling Japanese companies.

To pile pressure on the BOJ, Abe even threatened to revise or scrap the 1998 law that guaranteed the bank’s independence from government.

While the efficacy of Abenomics is in doubt, it has fueled the recent weakening of the Japanese currency. The yen has lost more than 5 percent in value against the U.S. dollar since mid-November.

On Dec. 17, it fell to 84.48 per dollar, the lowest since April 12 last year. The currency is highly likely to maintain the downward trend, falling below 90 per dollar by the fourth quarter of 2013.

Korean exporters should prepare for an era of a cheaper yen. The Korean won has gained more than 10 percent against the Japanese yen in the past three months. According to the Korea Institute of Industrial Economics and Trade, a 5 percent gain in the Korean currency’s value against the yen could reduce Korean exports by up to 3 percent.

The Seoul government also needs to step up monitoring of the foreign exchange markets as a falling yen could spark a yen carry-trade. Hot money inflows could surge as investors would be tempted to borrow low-yielding yen to invest in higher-yielding assets in Korea.

The need to guard against capital inflows is all the greater as the U.S. Federal Reserve announced last week that it would increase its bond purchasing program.

The Fed has been purchasing $40 billion worth of mortgage-backed securities a month since September in a third round of quantitative easing. It said it would purchase additional state bonds worth $45 billion monthly starting in January.

The loose monetary policy of the world’s No. 1 and No. 3 economies is likely to add fuel to a currency war. The Korean government should not let its guard down.