Among the many changes that the COVID-19 pandemic has brought, probably the most troublesome development for Korea’s trade would be associated with the weakening value of the yen. Throughout the years before the pandemic, the rate of the Yen was stable—around 110 yen per dollar. Occasionally, the rate fell below or soared above 110 yen, but never failed to recover in a short period of time, staying at the 110 level for the last 30 years since the early 1990s. But this has completely changed after the pandemic, rendering the exchange rate over 140 yen per dollar; once in September, 2022 and then again in June 2023.
Almost all currencies weakened against the dollar in 2022 but the yen was the weakest of all the major currencies. The reason for this is very simple and straightforward. While the federal reserve had to raise its key interest rates from almost 0% to 5% to curb the surging inflation faster than any other country in the world, Japan, however, had to stick with a negative interest rate policy, making the gap of the key rates between the two countries a record level of 5.35%. This huge disadvantage of the yen’s interest rate would cause people to hold less of the Japanese currency, and more of the US dollar denominated assets. Consequences of the interest rate gap would then show up in extreme outflows of funds from Japan to overseas, mostly to the US, which in turn, would fuel further decline in the value of yen.
One particular concern is whether the yen would be able to reach 150 again, like after the Plaza Agreement in 1984. Just before the agreement, the yen exchange rate maintained its level around 250 Yen, contributing to an unacceptably big trade deficit for the US. Consequently, the finance ministers of G5 countries gathered together in a New York hotel to readjust the currency values, and they agreed temporarily to lower the yen level around 150. It fell further to 80 yen in the mid-1990s, but the great Kobe earthquake in 1995 and the Abenomics policy in 2013 had rendered it back to the 110 level. The 150 yen per dollar rate in October 2022 raises afresh the possibility for the yen rate to climb back to 150, which is far from being absurd as long as the Bank of Japan sticks with the –0.1% interest rate.
The depreciation of the yen has two critical challenges for Korea’s trade. First, Japanese exports will become very cheap in the world’s markets, and this will significantly jeopardize Korean exports. As most Japanese exporters are pricing their products in yen, not in the dollar, the fluctuations in the exchange rate instantly alters the export price in dollar terms. Japanese exporters changed from the dollar-pricing practice to yen-pricing in the late 1990s to avoid the exchange rate risks. Automobiles, electronic products, ships, steel products, petroleum products, machinery, and all the major export items for Korean manufacturers will have to face fierce price competition from Japanese counterparts.
Another challenge is the potential inflow of Japanese products into Korean markets. So far, Korean imports from Japan has been mostly limited to technology items that Korea finds difficult to produce locally. As Japanese products become immensely cheap, Korea would have to import not just the technology products but also miscel-laneous everyday consumer products such as beer, candy, clothing, or shoes, just to name a few. Japan and Korea both have maintained quite a close cultural affinity and this tie could be a grand conduit to import such sundry goods from Japan when prices become more than affordable due to yen’s depreciation. In short, the yen’s depreciation would decrease Korean exports to the world on the one hand, and increase Japanese imports on a grand scale, on the other. This could be pose a serious blow to Korea’s trade, which has been suffering a long decline in the export value over the last right months.
The current Yoon Administration well understands the importance of Korean exports for growth and the creation of jobs. The administration, from the onset, has been pushing various export promotion policies under the leadership of the strategic export promotion conference. The first such conference was held in November 23, 2022 and with the goal of becoming a top five exporter in the world, the conference designated five major areas for targeted export enhancement policies. The five areas were overseas construction, tourism and contents, digital and bio industries, space and defense industries as well as the traditional mainstream industries such as automobile, chemical products, semiconductor, and steel. Three additional such conferences have been held so far, and the focus of policy orientation ranged from defense industry products in the second conference to K-pop in the fourth. Another important policy for export promotion was to provide more than ample export finances to firms. Indeed, the administration plans to expand export finance from KRW 351 trillion to KRW 360, worth almost USD 280 billion. In addition, the administration wishes to export USD 50 billion worth in infrastructure investments, becoming a global top four exporter in that area by 2027. Grandiose in nature, however, all these policies were not designed specifically to combat the competition from the yen depreciation. The 30% yen depreciation so far is big enough to nullify all the minute and detailed export promotion policies advanced by the administration. The exporters want more concrete measures to drastically enhance competitiveness against Japanese counterparts.
There are two approaches for that purpose. One is building up capabilities in Korean firms to confront Japanese competitors. That requires own finances, human resources and education, and technological development. The other approach is to cooperate with Japanese competitors with mutual investment, human resource exchange, and technology development. In other words, instead of competing directly against Japan, the aim would be to enhance the arena of mutual interaction in technology development, human resource exchanges and financial investment. At first, these approaches seemingly have no direct effect on increasing our exports to Japan, or sometimes may mean further deterioration, but in the longer run, it will be fruitful to expand our exports not just to the global market but to the Japanese market as Korean companies become more familiar to Japanese people and their markets. In short, instead of following an outright confrontation strategy to guard against the Japanese export surge, the better route is to rather try to assimilate and cooperate with Japanese manufacturers by investing together, marketing together, and researching together in a world of competition. The weaker yen is making this a lot easier than ever before.
By Professor Se Don Shin Professor Emeritus,
Sookmyung Women’s University
seshin@sm.ac.kr
* The opinions expressed in this article are the author’s own and do not reflect the views of KOTRA.
*This article is extracted from Invest KOREA Publications, 2022.