Japan quake feared to hurt Korean exports

The massive earthquake that hit Japan last week could slow down Korea’s exports as demand from the nation’s second-largest trade partner might contract significantly due to a protracted economic slowdown, experts said Tuesday.

Korea’s exports to Japan have been improving since the start of this year. During the first two months, Korea’s exports to Japan jumped 47.7 percent from a year earlier to $5.65 billion, while imports expanded 14.6 percent over the same period, according to the Korea Customs Service.

The fast-growing exports raised optimism that Korea might be cutting its years of trade deficits with Japan. In 2010, Korea’s trade deficit with the country stood at over $30 billion.

Observers, however, worry that exports could slow down as the already-stagnant Japanese economy might be undergoing further setbacks due to the massive earthquake that hit the nation last Friday, devastating much of the industrial infrastructure along its eastern coastline.

“The question remains over how fast Japan can bring its devastated infrastructure to normal, such as electricity and transportation systems, and get its economy back on track,” said Yu Byong-gyu, a senior economist at Hyundai Research Institute.

“If things return to normal in a short period of time, it might not spell much trouble, but if not, our exports to Japan could get affected significantly,” he added.

The 9.0-magnitude quake and an ensuing monster tsunami pulverized many parts of the nation’s eastern coastline, leaving tens of thousands of people dead or missing.

The natural disasters destroyed much of the region’s industrial infrastructure, including power plants, prompting the government to enforce a rolling electricity blackout for the first time in decades to reduce energy-supply disruptions.

Experts said destroyed industrial infrastructure and freezing domestic demand could affect the nation’s economic activity, which they worry could cast a shadow over its growth outlooks.

Astronomical costs needed to rebuild the country will also likely raise the nation’s already-high fiscal debt, clouding its long-term growth prospective.

Last year, Korea’s exports to Japan amounted to about $28.2 billion, with imports reaching $64.3 billion. Of the total exports, sales of electric and electronic goods accounted for 22.4 percent, the customs office said. Exports of oil-related products made up 13.1 percent, followed by steel products with 10.2 percent.

The Finance Ministry said the government is ready to respond if local markets suffer severe liquidity shortages, but sees no need to intervene at the moment.

“The situation (in Japan) is still going on and I think markets are in the middle of digesting the shock,” Yoon Jong-won, head of the ministry’s policy division.

“The government is ready to help when markets are faced with liquidity shortages but I don’t think we are at such a stage,” he said.

The Financial Supervisory Service said there is only a slim chance that Japanese investors will pull their money from the local market in the short term.

In the aftermath of the disaster, the likelihood of Japanese investors and companies repatriating their funds from overseas has increased. This will likely strengthen the yen, which will in turn crimp the recovery of the world’s third-largest economy and its exports.

The FSS, however, said that even if Japanese capital outflows take place, their impact on the Korean market is expected to be limited, given the small size of investment by Japanese investors.

In the Korean stock markets, Japanese investors held shares worth 6.61 trillion won ($5.88 billion) as of the end of last month, accounting for a meager 1.8 percent of the total foreign stock holdings, according to data by the FSS.

Their bond holdings here of 708.2 billion won as of end-February, accounting for only 1 percent of the total holdings of foreign investors, remained even smaller.

“Japanese investors are mostly viewed as long-term investors,” said an official at the FSS. “We feel there is only a small chance that Japanese capital will flee the country in the short term, and if any does, the impact would be limited on the local financial markets, given the size of their investment.”

Analysts said the Japanese currency is likely to climb against the U.S. dollar, driven by demand for asset repatriation, but the yen’s strength is expected to be short-lived as Japanese authorities have been injecting massive liquidity into the financial system.

The Bank of Japan on Monday pumped a record 15 trillion yen into the financial system in a bid to stabilize the financial markets. The BOJ kept its key interest rate at near zero and doubled the size of its asset-purchase scheme to 10 trillion yen in an effort to help calm the financial market and ease the credit crunch.

“The yen’s ascent had lasted for about three months in the wake of an earthquake in Kobe in 1995. But this time, the Japanese currency’s gain is not likely to continue for a long time due to Japan’s heavy public debt and the government’s strong vow for liquidity supply,” said Jeong Young-sik, an economist at Samsung Economic Research Institute.

Jeong said the Korean currency is likely to face volatility until the exact damage of the strongest quake in Japan’s history is determined, but over the long term, the local unit is forecast to gain ground to the dollar.

Jeon Seung-ji, a currency analyst at Samsung Futures Co., cast a similar view, saying that if the Japanese economy recovers from its deep downturn through reconstruction and investor sentiment gains ground, the won is likely to be under upward pressure to the dollar.

(From news reports)