South Korea's Economic Recovery Hampered by 'Record-Low Yen'... Concerns Over Widening Current Account Deficit

Recently, concerns have arisen that the prolonged historic 'weak yen' phenomenon, with the yen falling to the 800-won range for the first time in eight years, could become an obstacle to the recovery of Korean exports. This is because while Japanese companies' price competitiveness increases, our manufacturing and export companies may relatively weaken in competitiveness.

According to the financial market on the 25th, the won-to-yen exchange rate in the Seoul foreign exchange market fell to 897.49 won per 100 yen at one point during trading on the 19th. The won-yen exchange rate falling below 900 won is the first time in eight years since June 25, 2015.

Typically, a deepening weak yen is identified as a factor that reduces the export competitiveness of our companies. This is because technologically advanced Japanese companies can outcompete our companies in the global market by leveraging lower prices. According to a report published by the Korea Economic Research Institute at the end of last year, the export competition index between Korea and Japan in manufacturing is 69.2. This figure exceeds the export competition indices between Korea and other major countries such as the U.S. (68.5), Germany (60.3), and China (56.0). Particularly, industries with high export competition such as automobiles, steel, and machinery are expected to be hit hard.

Statistics from 2005 to the third quarter of last year show that when the yen's value falls by 1 percentage point, Korea's export prices (-0.41%P) and volumes (-0.20%P) decrease, resulting in a decline in the export amount growth rate (-0.61%P). Previously, in 2012, when Japan experienced a historic weak yen at around 885 won per 100 yen, the export growth rate of our companies was reduced by about 2 percentage points due to price competitiveness.

There is also concern about the deterioration of the current account balance due to an increase in the travel balance deficit. As the yen weakens, the number of tourists traveling to Japan increases, which could widen the travel balance deficit. The travel balance deficit means that the amount spent by Koreans abroad exceeds the consumption of foreigners visiting Korea. It is known that over 2 million Koreans visited Japan by April of this year.

The Hyundai Research Institute forecasted, "Due to the prolonged goods balance deficit and the expansion of deficits in transportation and travel balances leading to a deterioration in the service balance, the current account surplus this year will be significantly reduced." Accordingly, Hyundai Research Institute suggested that careful attention is needed for items with intensified export competition compared to Japan, such as chemical products, steel, and non-ferrous metal products targeting the U.S. market, and machinery and electrical/electronic products targeting the Chinese market.

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