Japan's Persistent 'Enjo' Policy... "Negative Impact on South Korea's Prices and Exports"

Despite Global Inflation, Only Japan Maintains 'Solo Low Interest Rates'
Expectations for Corporate Earnings and Consumption Improvement Amid Yen Depreciation
Korean Exporters Hit by Declining Price Competitiveness
Domestic Prices Rise as Won Also Depreciates

Haruhiko Kuroda, Governor of the Bank of Japan, attended the House of Councillors plenary session in Tokyo on the 13th and responded to questions from lawmakers. [Image source=Yonhap News]

Despite global inflation, Japan continues to maintain its 'solo low interest rate' policy, which is analyzed to potentially have an even more negative impact on already unstable South Korean prices and exports. If Japan continues its monetary easing policy to induce a decline in the value of the yen, the value of the Korean won will also fall, causing domestic import prices to rise further and reducing the price competitiveness of export companies competing with Japan.

According to the financial and foreign exchange markets on the 21st, Japan recently decided at its monetary policy meeting to keep the benchmark interest rate unchanged (-0.1%) and maintain the Yield Curve Control (YCC) policy, increasing interest in the impact on the South Korean economy. The Bank of Japan (BOJ) is pursuing an ultra-loose monetary policy by purchasing massive amounts of government bonds through the YCC policy to keep the 10-year government bond yield below 0.25%.

While most major countries, including the United States, are raising benchmark interest rates in response to rising prices, Japan alone continues low interest rates, causing the yen's value to plummet. On this day, the dollar-yen exchange rate traded at 135.07 yen, and the market predicts it could reach 136 to 138 yen within a few days. The yen reaching around 140 yen against the dollar has only happened during the 1998 East Asian financial crisis or just before the bubble burst in the 1980s.

The problem is that the decline in the yen's value could also negatively affect the South Korean economy. A weaker yen increases the price competitiveness of Japanese products, which could immediately harm South Korean companies competing with Japan. Jeong Gyu-cheol, head of the Economic Outlook Office at the Korea Development Institute (KDI), said, "Export companies such as those in automobiles and machinery compete with Japan, so a weaker yen could have a negative impact."

In particular, the yen and the won sometimes show synchronized movements, so it is expected to affect exchange rates and domestic prices. Lee Ji-pyeong, a Japanese economy expert and special professor at the Convergence Japan Area Studies Department at Hankuk University of Foreign Studies, explained, "Since Korean companies could be hit by a weaker yen, selling pressure on the won in the foreign exchange market could intensify, leading to won depreciation. In this case, import prices would rise, significantly impacting domestic inflation." This points to the possibility of the 'yen depreciation risk' adding to the domestic inflation rate, which already exceeds 5%.

Japan, which has suffered from long-term low growth, expects to improve corporate performance and expand consumption through financial easing and a weaker yen, so the yen depreciation is expected to continue for the time being. However, there are also concerns that Japan is facing increasing price burdens recently due to continuous yen depreciation and rising international raw material prices, making it difficult to maintain monetary easing measures. Professor Lee said, "The yen depreciation trend will continue, but around 140 yen will be the limit."

This content was produced with the assistance of AI translation services.