Threat of currency shock in Korea

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Global investment banks and analysts estimate that Korea will have difficult times to protect the value of won this year. Let’s take a close look at why.

On January 8, the value of Samsung Electronics share was approximately $1,290 which showed a $200 drop from the previous month. This means that almost 12 billion won of Samsung Electronics’ market capitalization evaporated within a month. Other Korean companies such as Hyundai Motors are experiencing the same phenomenon. Renowned analysts say that this is affected by external factors such as currency.

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Due to the seriousness of the matter, the Korean government and financial industry is paying a close attention on this issue. Two countries that Korea is taking a close look at are the US and Japan. Fed’s decision to maintain the QE3 this year has increased the value of dollar. You should have read in news articles that the Janet Yellen will become the next Fed chairwoman. We do not know what kind of stance she would take regarding the QE policy but no matter what the result is it certainly would pose a significant impact on the foreign exchange market including Korea. Most of the renowned analysts are estimating that the Fed will start tapering the bond buying program starting from March at the earliest. Korea’s Ministry of Strategy and Finance mentioned that the quantitative easing could be the greatest external risk to the national economy.

On the other side, in Japan, due to its assertive economic policy known as ‘Abenomics’, the value of yen is getting weaker everyday. In the past, ‘100 yen = 900 won’ had been considered as a formula used when switching back and forth the two currencies. But the formula no longer applies because of Abenomics.

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The Bank of Korea estimated that the weak yen would have a great impact on industries such as machinery, car-making, tourism and steel. In the past, Abenomics didn’t seem to have much impact on Korea’s export and import but it will be different this year according to the BoK. It said that the Japanese government will provide more yen into the market in order to raise consumption tax rate which is expected to drop the value of yen further. Basically, the reason why the steel and car-making industries are expected to suffer damage is because those are the industries which are competing severely with Japan. In addition, the BoK estimated that Korea’s external price competitiveness has been dropping since September 2012 by 15%.

It is true that Korea’s car export volume grew significantly but lots of Japanese car manufacturers are increasing their market dominance in North-America. Of course, as you all know, Korea’s dependence on the external market is a lot higher than that of domestic demands. To such backdrop, the MOSF considers the weak yen as one of the biggest threat to Korea’s economy along with the Fed’s tapering.

Korea is experiencing a serious currency threat just like other countries in the world. Foreign investors started to sell out their stocks dropping the KOSPI index lower for consecutive days. Korea should pay a sharp attention on external trend and come up with additional means to further develop the economy.

Hyok Hee Kwon (kwonhyokhee@naver.com)

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