[BOK Focus] Historic Low Yen Hurting Exports?…BOK and Market Say "Concerns Are Overblown"

Concerns Over Declining Export Competitiveness Due to 'Super Yen'
But Bank of Korea and Experts Say "No Significant Impact"
Few Competing Items, Technology More Important Than Price
More Local Manufacturing Firms Reduce Exchange Rate Influence
Expectations for Japanese Interest Rate Hike Remain... "Tolerable Up to 1%"

Opinions are divided on the impact of the "Enjeo (yen depreciation)" phenomenon on South Korea's exports. While there are significant concerns that a decline in the yen's value could weaken the price competitiveness of South Korean exporters competing with Japanese companies, potentially worsening the already fragile trade balance, the Bank of Korea and many experts who compile the current account data foresee little impact from yen depreciation. They explain that the period when yen depreciation had a substantial effect on South Korean exports has already passed, and since the Bank of Japan (BOJ) is likely to shift toward tightening monetary policy, there is no need to worry excessively about yen depreciation at present.

According to the foreign exchange market on the 11th, the opening won-yen recalculated exchange rate was 919.01 won per 100 yen, up 2.33 won from the previous trading day's 3:30 p.m. reference price. The won-yen exchange rate, which had fallen to the 800-won range for the first time in eight years at 897.29 won per 100 yen on the 5th, has since reversed to an upward trend, fluctuating in the low 900-won range. However, even this level is very low when viewed as a long-term trend. The won was above 1,100 won per 100 yen in March 2020, and even earlier this year when the yen depreciated significantly, it mostly moved in the mid-to-high 900-won range.

Subsequently, the yen's value sharply declined, pushing the yen-dollar exchange rate from around 127 yen at the beginning of this year to nearly 145 yen. This yen weakness is due to the Bank of Japan continuing its large-scale monetary easing policy, widening the interest rate gap with major countries such as the United States. In particular, concerns over additional tightening by the U.S. Federal Reserve (Fed) last month boosted the dollar's value, and recently, the Korean won also strengthened, making the yen's weakness against the dollar and won even more pronounced. Japan has stated it will maintain its low-interest-rate policy for the time being to stimulate the economy, but the Fed is signaling potential rate hikes not only in July but also in September.

Damage to Trade Balance from Yen Depreciation? ... "A Thing of the Past"

Generally, severe yen depreciation is considered a negative factor for South Korean exports. A decline in the yen's value reduces the price competitiveness of domestic products compared to Japanese export goods in the international market, which could significantly harm sectors like steel and automobiles that compete with Japan in exports. The Korea Economic Research Institute recently estimated that based on past trends, a 1 percentage point drop in the yen leads to a 0.61 percentage point decrease in South Korea's export growth rate, resulting in an export reduction of over $10 billion in the first half of this year alone due to yen depreciation.

However, official statistics show that so far, the impact of yen depreciation on the trade balance has been minimal. A Bank of Korea official explained, "Up to May, both the yen and the won depreciated significantly, so statistically, yen depreciation had little effect on the current account balance," adding, "Since June, the won has normalized while the yen remains weak, which could affect the travel balance going forward." Looking at the depreciation against the dollar, from the start of this year to May, the won depreciated by -4.72% and the yen by -5.79%, showing little difference. But since June, the won has appreciated by 1.16%, while the yen has fallen by 2.54%, widening the gap.

Moreover, the Bank of Korea expects little impact on South Korean exports or the trade balance even after the yen's sharp decline since June. The degree of export competition with Japan has weakened compared to the past, and for some competing products, product competitiveness is more important than price, so the effect of yen depreciation is expected to be limited. Above all, if the semiconductor sector, a core part of South Korea's exports, recovers in the second half, the overall export situation could improve, further minimizing the negative effects of yen depreciation.

A Bank of Korea official said, "There are forecasts that Samsung Electronics' performance will recover from the third quarter, but the semiconductor sector is not the only area where South Korea and Japan compete," adding, "There is competition in automobiles, but mainly in electric vehicles and sport utility vehicles (SUVs), where technology is more important than price." Looking at the May current account results released on the 7th, semiconductor exports fell sharply by 35.6% and petroleum products by 33.0% year-on-year based on customs clearance, but passenger car exports grew by 52.9%.

The Korea Economic Research Institute also explained that while some items may be affected by yen depreciation, the influence is much weaker than in the past. Choo Kwang-ho, head of economic policy at the institute, said, "In the past, production was domestic and then exported overseas, so exchange rates had a big impact, but now many companies have established factories locally, offsetting exchange rate effects." He added, "Recently, South Korea competes with Japan in the global market not only on price but also on product competitiveness, so the impact of yen depreciation is clearly less than before."

Kazuo Ueda, Governor of the Bank of Japan, Japan's central bank, suggested on the 28th of last month (local time) at the European Central Bank (ECB) Annual Forum held in Sintra, Portugal, that if high inflation continues next year, the Bank of Japan's large-scale monetary easing policy, which has lasted for more than 10 years, could be changed.
[Image source=Yonhap News]

Burden of Prolonged Yen Depreciation... But BOJ Policy Likely to Change in Second Half

Of course, if yen depreciation continues for a long time, medium- to long-term damage to domestic exporters is inevitable. However, both the Bank of Korea and experts believe the Bank of Japan will find it difficult to maintain the yen depreciation situation for long. The BOJ currently keeps the 10-year government bond yield low within ±0.5% through its Yield Curve Control (YCC) policy, but if the economy and inflation exceed target levels, it will have no choice but to abandon YCC or raise rates slightly. According to a recent Bank of Korea report on the Japanese economy, the performance of large manufacturing companies in June exceeded market expectations, and improvement is expected with a recovery in automobile production.

Lee Ji-pyung, a special professor in the Convergence Japan Area Studies Department at Hankuk University of Foreign Studies, said, "There is still a possibility that the BOJ will raise interest rates by the end of the year and completely abolish the YCC policy next year," adding, "Raising rates could excessively increase interest burdens on Japan's massive government debt, but simulations by the Japanese Ministry of Finance suggest that rates up to the 1% range are manageable, so a slight adjustment in the second half is possible."

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