Is ‘inflationary tsunami’ heading toward Korea?

Japan has injected massive liquidity into its economy in the wake of Friday’s devastating earthquake, while the U.S. will continue quantitative easing to speed up economic recovery.

The liquidity injections by the two major pillars of the global economy, coupled with a potential rebound in raw material prices and a weakening of the Japanese yen, are raising fears of an “inflationary tsunami” heading toward Korea.

The Bank of Japan pumped an additional 3.5 trillion yen (43 U.S. billion dollars) into its financial market Wednesday to help stabilize its economy after the quake, tsunami and nuclear disaster. The bank will also buy 2 trillion yen (23 billion dollars) in Japanese government bonds through repurchases March 18-22.

Tokyo has poured more than 40 trillion yen (486.4 billion dollars) into its economy following the quake.

In New York, the U.S. Federal Reserve unanimously voted Tuesday to continue the Treasury bond-buying program worth 600 billion dollars through June. It also repeated its pledge to hold rates at ultra-low levels for an “extended period.”

Many market participants had expected the Fed to suspend quantitative easing as the U.S. economy was showing signs of recovery.

With massive liquidity injections by the U.S. and Japan, international prices of raw material are expected to rise again after a slight setback. Though they have stabilized amid investor risk aversion after Japan’s earthquake, they will rebound when Japan starts restoring its economy.

Higher raw material prices raise those of imported goods, including oil products, and put additional inflationary pressure on the Korean economy. With Korea heavily dependent on Japanese parts and materials, a setback in their imports will raise the prices of related products.

Kim Dong-yeol, research fellow at Hyundai Research Institute, said, “The prices of flash memory chips used in iPads and iPhones are known to have jumped around 10 percent. Because no country can replace Japan in providing key parts and material imports, the shortage will eventually push up import prices.”

Analysts say the yen’s strength will be short-lived. The yen remains strong as Japanese investors are buying it back to bring overseas investment back into their nation but massive liquidity injections will eventually weaken the currency.

A decline in the yen’s value pushes up that of the greenback, which in turn pushes down the value of the Korean won.

Shin Min-yeong, economics research director at LG Research Economic Institute, said, “The yen’s strength will be short-lived due to the Japanese government’s fiscal deficit. A weak yen and strong dollar will push down the won’s value, raising import prices and worsening inflation in Korea.”

achim@donga.com