(Reuters) - South Korean authorities won't sit on their hands while a tumbling yen undercuts the country's export competitiveness, the central bank chief said on Friday, but policymakers could be reluctant to reduce interest rates, and currency intervention offers limited relief.
The relative strength of the Japanese and South Korean currencies is a sensitive topic in Seoul, given the rivalry between the two countries, and the yen has dropped 30 percent against the won in the past two years.
Bank of Korea Governor Lee Ju-yeol said on Friday that while there are limitations to South Korea's ability to counter the weakening yen, "we will not stand pat."
A South Korean finance ministry official told Reuters that the government will work toward keeping the won from moving out of sync with global exchange rates, an indication it will not target the yen specifically.
The won fell about 1 percent on Thursday after Vice Finance Minister Joo Hyung-hwan was quoted as saying the government would manage the dollar-won rate to align it with the weakening yen, although the finance ministry later said the comment was misunderstood and the currency regained most of its losses.
The current weakening of the yen follows a decision last month by the Bank of Japan to dramatically expand its debt-buying stimulus drive, pushing down bond yields and sending the yen to 115.52 against the dollar on Thursday, its weakest in seven years.
The Bank of Japan move increased the chances that the Bank of Korea will cut its policy rate to a record low, some economists said, although the central bank may prefer not take that plunge under mounting criticism by opposition politicians of policies that encourage more borrowing by debt-strapped households.
"It's difficult to make monetary policy decisions just based on currency rates," South Korean Finance Minister Choi Kyung-hwan told lawmakers on Thursday. Past bouts of yen weakness have not proven that painful for Korean exports, but Japanese manufacturers have yet to cut their export prices, an option they could choose to exercise.
South Korea, Asia's fourth-largest economy, has managed to ride out waves of monetary stimulus by the United States and Japan in recent years relatively unscathed, bolstered by strong fundamentals, plentiful foreign exchange reserves, and a hefty current account surplus.
Meanwhile, another finance ministry official has told Reuters it will probably not complain about Japan's monetary policy or single out a specific country at the upcoming G20 Leaders' Summit on Nov. 15 to 16, and that the atmosphere would mirror that of previous meetings, where Japan's weakening yen was only vaguely mentioned in communiques.
The won KRW= has also weathered volatility well, as authorities repeatedly stepped in to prevent excessive one-sidedness in the market.
They have also engaged in dollar-buying intervention to weaken the won indirectly against the yen. In a note dated Thursday, Goldman Sachs predicted the won will strengthen against the yen and weaken against the dollar.
"This combination is not necessarily negative for overall Korean exports in our view," it said, noting that sectors that compete directly with Japan - autos, auto parts, steel and chemicals - account for less than a third of Korean exports.
The presidential Blue House has told South Korean companies to tough it out, urging them to use the weakening yen as an opportunity to expand investment in Japanese equipment and improve their business structure.
RATE CUT VIEWS LIVE ON
Despite concerns over household debt, another rate cut may be necessary, some analysts said. Indeed, the weakening yen was a key point during the Bank of Korea's Oct. 15 monetary policy meeting, when it lowered rates by 25 basis points to 2.00 percent, matching a record low.
"Our price competitiveness in sectors where competition is high against Japanese companies is falling," one unidentified central bank board member said, according to minutes released on Tuesday.
Another board member expressed concern that the negative effects from a weakened yen could be bigger than in the past, as diminished demand from the euro zone and soft growth in some emerging market countries pose additional risks to exports.
Nomura economist Kwon Young Sun wrote in a note this week that he sees an increasing likelihood that the Bank of Korea will cut rates in coming months. Economists at ANZ and ING also expect a rate cut in coming months.
"We expect JPY (yen) weakness to have a greater negative effect on the Korean economy this time," Kwon wrote.
"First, we believe firms will delay their investments due to uncertainty over the KRW (won) market, and second, underperforming Korean equity markets are likely to have a negative wealth effect on private consumption."
reuters.com
The relative strength of the Japanese and South Korean currencies is a sensitive topic in Seoul, given the rivalry between the two countries, and the yen has dropped 30 percent against the won in the past two years.
Bank of Korea Governor Lee Ju-yeol said on Friday that while there are limitations to South Korea's ability to counter the weakening yen, "we will not stand pat."
A South Korean finance ministry official told Reuters that the government will work toward keeping the won from moving out of sync with global exchange rates, an indication it will not target the yen specifically.
The won fell about 1 percent on Thursday after Vice Finance Minister Joo Hyung-hwan was quoted as saying the government would manage the dollar-won rate to align it with the weakening yen, although the finance ministry later said the comment was misunderstood and the currency regained most of its losses.
The current weakening of the yen follows a decision last month by the Bank of Japan to dramatically expand its debt-buying stimulus drive, pushing down bond yields and sending the yen to 115.52 against the dollar on Thursday, its weakest in seven years.
The Bank of Japan move increased the chances that the Bank of Korea will cut its policy rate to a record low, some economists said, although the central bank may prefer not take that plunge under mounting criticism by opposition politicians of policies that encourage more borrowing by debt-strapped households.
"It's difficult to make monetary policy decisions just based on currency rates," South Korean Finance Minister Choi Kyung-hwan told lawmakers on Thursday. Past bouts of yen weakness have not proven that painful for Korean exports, but Japanese manufacturers have yet to cut their export prices, an option they could choose to exercise.
South Korea, Asia's fourth-largest economy, has managed to ride out waves of monetary stimulus by the United States and Japan in recent years relatively unscathed, bolstered by strong fundamentals, plentiful foreign exchange reserves, and a hefty current account surplus.
Meanwhile, another finance ministry official has told Reuters it will probably not complain about Japan's monetary policy or single out a specific country at the upcoming G20 Leaders' Summit on Nov. 15 to 16, and that the atmosphere would mirror that of previous meetings, where Japan's weakening yen was only vaguely mentioned in communiques.
The won KRW= has also weathered volatility well, as authorities repeatedly stepped in to prevent excessive one-sidedness in the market.
They have also engaged in dollar-buying intervention to weaken the won indirectly against the yen. In a note dated Thursday, Goldman Sachs predicted the won will strengthen against the yen and weaken against the dollar.
"This combination is not necessarily negative for overall Korean exports in our view," it said, noting that sectors that compete directly with Japan - autos, auto parts, steel and chemicals - account for less than a third of Korean exports.
The presidential Blue House has told South Korean companies to tough it out, urging them to use the weakening yen as an opportunity to expand investment in Japanese equipment and improve their business structure.
RATE CUT VIEWS LIVE ON
Despite concerns over household debt, another rate cut may be necessary, some analysts said. Indeed, the weakening yen was a key point during the Bank of Korea's Oct. 15 monetary policy meeting, when it lowered rates by 25 basis points to 2.00 percent, matching a record low.
"Our price competitiveness in sectors where competition is high against Japanese companies is falling," one unidentified central bank board member said, according to minutes released on Tuesday.
Another board member expressed concern that the negative effects from a weakened yen could be bigger than in the past, as diminished demand from the euro zone and soft growth in some emerging market countries pose additional risks to exports.
Nomura economist Kwon Young Sun wrote in a note this week that he sees an increasing likelihood that the Bank of Korea will cut rates in coming months. Economists at ANZ and ING also expect a rate cut in coming months.
"We expect JPY (yen) weakness to have a greater negative effect on the Korean economy this time," Kwon wrote.
"First, we believe firms will delay their investments due to uncertainty over the KRW (won) market, and second, underperforming Korean equity markets are likely to have a negative wealth effect on private consumption."
reuters.com
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