Park government to ‘preemptively counter’ FX volatility

Following is the fifth and last in a series of stories featuring economic issues facing the Park Geun-hye government that was inaugurated on Feb. 25. ― Ed.


When executives of Korean exporters shared their concern with President Park Geun-hye over the volatility of the Korean won during the transition period, the nation’s 18th chief executive said then that her government will aim to maintain foreign exchange stability through “preemptive measures.”

The president said she was well aware that Korea is facing economic hardships both at home and abroad amid the global slowdown, and that a weak yen is weighing on an increasing number of Korean companies.

“I am fully aware of the importance of maintaining foreign exchange stability,” Park said. “We will preemptively and effectively counter (the FX volatility) not to let domestic companies generate losses.”

She added that her government will do all it can to achieve $2 trillion in yearly exports.

Although her government refrained from making any hasty comments regarding foreign-exchange policy, market analysts expect that the president’s economic team will move to implement countermeasures to cushion the negative spillover from Japan’s weak yen drive.

The Korean won is among currencies also including the Mexican peso and Russian ruble that strengthened the fastest since 2012 against major currencies as easy-money policies in advanced economies drove capital inflow into the domestic financial market.

And the pace of its appreciation has gained further ground as Japan voiced out its monetary policy aimed at supporting a weak yen to achieve 2 percent inflation and revive its stagnant economy through exports.

“Japan could prompt retaliation from other countries,” said Moody’s Analytics in a report.

It added that Thailand and Korea are “most likely to take action” through currency depreciation and capital control.

“This will not be a significant problem unless it spills over into trade restrictions, which would hurt global growth. Trade-dependent Asia would suffer under this scenario,” Moody’s Analytics said.

Park’s government has yet to give a clear, detailed policy guideline. Both G7 and G20 finance ministers and central bankers also refrained from pointing out Japan’s currency depreciation move, but showed commitment to “market-determined and flexible exchange rate systems” and cooperation for financial stability.

“We reiterate that excess volatility of financial flows and disorderly movements in exchange rates have adverse implications for economic and financial stability,” the Group of 20 financial policymakers said in a statement.

“We will refrain from competitive devaluation. We will not target our exchange rates for competitive purposes, will resist all forms of protectionism and keep our markets open.”

But Korea’s Ministry of Strategy and Finance had indicated that it will further strengthen rules on the so-called “three sets of transaction taxes” on bonds by foreign investors, and derivatives and foreign currency debt by banks.

Further, a possible adaptation the Tobin Tax, or currency transaction tax, had been mentioned by financial policymakers during Park’s transition period, as well as lowering the central bank’s key base rate not only to spur job growth, as Park seeks to achieve a 70 percent employment rate, but also to weaken the won.

These are in line with efforts to counter Japan’s weak yen policy and stem the appreciation of the Korean won, whose value gained to around 1,085 won this month from 1,177 won on June 1, 2012.

The central bank is closely monitoring the FX market, but it is not the main factor affecting its decision on policy rate, said BOK governor Kim Choong-soo said last month after freezing its rate at 2.75 percent for the fourth consecutive month.

The central bank will aim to effectively mix monetary and fiscal policies in the best interest of the economy, he added.

An introduction of the Korean-version Tobin Tax was not part of Park’s policy pledges, but analysts expect the new government and its financial policymakers to discuss it in the near future.

“It is likely to be dealt with as part of efforts to control the pace (of the won’s appreciation),” Sun Yoo, an economist at Woori Investment & Securities.

Analysts warned of the side effect of capital control through taxes as they can slow financial transactions, which could push up market interest rates and lead to further burden on household debt.

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