Korea moves to rein in currency strength

The Korean won is being pushed to the edge by two major international currencies of the U.S. dollar and the Japanese yen, raising concerns over Korean exports, the country’s main growth engine.

With Japan joining the U.S. in monetary easing to stimulate its economy, there is a high chance that the Korean won will further strengthen against their currencies, causing its top-selling automobiles and tech gadgets to lose their price competitiveness overseas.

Finance Minister Bahk Jae-wan has stepped in to alleviate concerns about exports by saying that the government has “completed its preparation” against foreign exchange fluctuations, indicating its intentions to intervene to prevent the won-dollar or the won-yen rates from further sliding.

Bahk did not elaborate further as to when or how the government will make a currency intervention.

His remarks follow those of Bank of Korea Governor Kim Choong-soo who also recently said in an economic meeting that “a weak yen is likely to negatively affect Korean exports,” citing the need to stabilize the volatility of the FX rate.

Analysts predict that the Korean government will step in when the won reaches around 1,050 won to maintain well above the psychological barrier of 1,000 won.

“We expect an intervention to happen when the FX rate slides to 1,050 won to keep it stable above 1,060,” said Lee Ji-hyung, an FX analyst at Woori Investment & Securities.

Korean automobiles and tech products are at the top of the list of exports most likely to see their sales dwindle on a stronger won, analysts said.

Data showed that the market caps of Korean automakers such as Hyundai Motor and Kia Motors have been dropping, while those of Japanese automakers such as Toyota and Honda are climbing due to the yen sliding since the second half of last year.

Japanese automakers’ market share in the U.S. has also grown under the weak yen, according to media reports.

A strong won works as a double-edged sword.

Although it tends to weigh down exports, prices drop for imports especially from Japan. Meanwhile, Korean buying power for overseas investments, mergers and acquisitions will strengthen.

Another downside of a strong won is the risk that Korea could see foreign tourism slow as outbound tourism rises.

However, given that Korea’s reliance on export for growth is relatively high, a strong won would do more harm than good, especially for small and medium enterprises, analysts say.

To battle a recession and deflation, Japan has resorted to implementing asset-purchase programs, despite criticisms and doubts from the international community.

Market analysts suggested that the latest move by the world’s third-largest economy may lead to a “currency war” that would prompt protectionism by other regions.

Finance Minister Bahk added that Japan’s monetary easing may help boost the economy in the short term, but would be costly in the long term.

Korea’s current account surplus and credit rating upgrades on top of monetary easing in the U.S. have attracted funds overseas, contributing to the appreciation of the won against the dollar since the second half of 2012.

By Park Hyong-ki (hkp@heraldcorp.com)