More fear than fact behind South Korean won's decline

[SEOUL] A stream of comments from South Korean policymakers about how a weak yen is hurting the economy have raised fears about won-weakening intervention and driven the currency down, even if the hard data barely backs up those concerns.

President Park Geun-hye was the latest to complain about how the weak yen was giving Japanese exporters an edge, warning a week ago that South Korean exporters' profitability could suffer. But there have been several other voices echoing the same concern, including the country's finance minister.

The won has weakened 5 per cent against the dollar in six weeks, although it is difficult to say how much of that has been driven simply by anticipation of intervention by the Bank of Korea, rather than by wider factors such as growth concerns in China and the US dollar's broad rally.

South Korea's healthy export growth this year meanwhile casts doubts over that uneasiness in policy circles about the exchange rate, while currency reserves data shows scant intervention. "I don't believe the weakening yen presents any credible threat to South Korean exports, but it's hard to bet against a government which describes it as a serious problem that needs to be dealt with," said a currency trader in Seoul, declining to be named given the sensitivity of the topic.

Some market players suspect the weak yen is merely an excuse for policymakers seeking to add a competitive currency to their toolkit of tax measures, government spending and other means Finance Minister Choi-Kyung-hwan is employing to push for growth. "What really alarmed authorities was how the won remained stubbornly bullish despite the strong dollar while other currencies depreciated," said another foreign exchange dealer. "The government may simply be using the soft yen as a convenient excuse when its real objective is to tackle the won's strength against the dollar," he said.

The won had indeed gained substantially against the yen in the past few years, gathering pace as Japanese Prime Minister Shinzo Abe pushed through his ambitious "Abenomics"plan of easy monetary and fiscal policy.

Having stood at 15.75 won per yen in October 2011, the South Korean currency had strengthened to 9.5 won per yen by September this year.

South Korea's reserves are up a modest US$18 billion since the start of the year, showing the effects of modest intervention early in the year as well as adjustments in the value of euro-denominated holdings. But reserves have fallen US$4 billion since July, indicating the BOK's intervention if at all was minimal.

The country's exports saw their biggest annual growth in nine months in September, while the country's current account surplus has been strong for years, seemingly indifferent to the yen plumbing multi-year lows against the won and dollar.

Similar disconnects have been seen often in the past where significant milestones in the yen-won exchange rate failed to produce a parallel effect on South Korean exports. When the yen slumped to a series of 10-year lows against the won in June 2006, South Korea's exports grew.

When over the course of 2013, the won rose to 10 per yen from 12.25, Korea's trade surplus surged 53 per cent.

South Korea's obsession with the yen-won exchange rate is a legacy of the past, and stemming from the fundamentally similar structure of the two economies' manufacturing sectors, and their overlapping exports of electronics, autos and petrochemicals. A direct yen-won market existed, but was closed in 1997.

But Korean authorities do not seem to have overcome their preoccupation with the yen's value. Analysts recommend they should rather focus on their main big export market, China, and on overall exchange rate competitiveness. "Historically, it is difficult to argue that yen-won has had any correlation with Korean exports," Sue Trinh, a strategist with RBC Capital Markets, said in a note to clients. "Periods of pronounced yen-won weakness have had no discernible impact on Korea's market share in its major export markets relative to Japan." - Reuters