Won-Yen Exchange Rate Hurting Exports

Small- and mid-sized enterprises (SME) in Korea are on red alert as the won continues to appreciate against Japan’s yen following its rise against the dollar.

Because domestic SME exports to Japan account for more than 50 percent of Korea’s total exports, exports and profitability will both be hurt if the won continues to rise.

According to the Korea International Trade Association’s research institute, the Korean SME year-on-year export growth rate to Japan decreased from 2.5 percent last December to ―5.3 percent in January, the only negative figure among Korean SME exports to foreign countries.

In contrast, Korea’s large conglomerates have seen their exports to Japan rise by 13.9 percent and 31.6 percent in the same months, respectively.

An exchange rate drop against the yen would have a bigger influence on SMEs due to their higher dependency on exports to Japan (50.3 percent) compared to China (33.9 percent) or the U.S. (33.6 percent).

At the end of 2004, the won was trading at 1,012 won for 100 yen, but that rate dropped by 15.1 percent to 859 won per 100 yen at the end of last year. The rate has fallen by another three percent since the beginning of this year.

Korea’s primary industries, including agriculture, have been the hardest-hit by the fall; if it continues, it will hit the profitability of secondary industries as well.

According to a survey conducted by the Trade Research Institute, 89.2 percent of SMEs with more than $100,000 in exports to Japan last year projected a decrease in exports this year, and 64.7 percent expect their exports to fall by more than 10 percent.

In addition, the survey shows that the fall in won/yen rate is affecting the profitability of the exported products.

Among the respondents, 87.2 percent said that they were in the red or just breaking even. A mere 10.8 percent said they were maintaining decent profit margins.

The Trade Research Institute’s chief researcher, Shin Seung-gwan, said, “If the current exchange rate continues, four out of 10 SMEs will face a net loss in their exports to Japan. The heavy chemical industry, as well as light industry, will be hit hard.”

Chang-Won Kim changkim@donga.com