Concerns Over Won-Yen Exchange Rate

Lee Ji-won of the Hyundai Motor Company, in charge of marketing, is intensely concerned about the exchange rate of the won against the yen. The prices of Hyundai products are getting a lot less competitive than those of Japan due to the won-yen exchange rate fall (appreciation of won) from late last year.

“Toyota sells its Yaris sedan in cheaper price than Hyundai’s Verna or Kia’s Pride in the U.S. market. If the won’s value further drops to the 700 level to 100 yen, the overall Korean car prices will become more expensive than Japan’s. We should not just sit on our hands,” says a Hyundai official.

Strong won against the yen might lead to an economic recession–

Koreans are getting concerned on a decrease in corporations’ profitability and an economic recession as the won falls to the range of 800 to 100 yen.

Historically, from the late 1970s, Korean economy suffered stagnation when the won was strong against the yen while it was booming with the weak won to the yen.

People are especially worried that the strong won may cause economic depression this time as the current economic situation is similar to the pre-financial crisis in 1997 – such as the aggravating current accounts.

What history tells us-

Looking into the Korean economic cycle from the 1970s to the Asian financial crisis, it shows that the exchange rate had a significant impact to the economy. The won-yen exchange rate is especially closely related each other as products of the two countries are usually in competition in the overseas market.

According to the Samsung Economic Research Institute (SERI), the Korean economy expanded six times during the period. The yen was strong to the won during the expansions, except one time between September 1980 and February 1984. In other words, the Korean economy benefited from the strong yen.

On the contrary, the yen was weak to the won in the six times’ economic contractions during the same period, except for a year to January 1993.

Indeed, from September 1985 to January 1988, during the Korean economic boom, the value of the yen jumped as high as 85.7% to the US dollar. But the won’s value rose just 13.2% – an indication that the yen was strong against the won. During that time, Korea achieved a big economic growth and saw a brisk stock market.

From January 1988 to July 1989, when the Korean economy was on the decline, however, the won rose 18.0% to the dollar while the value of yen decreased 9.3%. During this time, the economic growth slowed down and the stock prices plunged.

Also, the won was weak to the yen when the country’s economy was growing between January 1993 and March 1996 whereas it was strong in March 1996, when the current accounts balance sharply worsened, leading to the financial crises.

Kim Jeong-sik, professor of economics of Yonsei University says, “The present economic situation is almost the same as before the financial crisis. Foreign investors are pulling out capital from the country and the current accounts balance is becoming aggravated due to the fall of won-yen exchange rate. Now is the time for the government to consider interfering in the exchange rate issue.”

Exchange rates influence the economy less than the past but…-

Some view that the weak won would not be a big problem as the won-yen exchange rate has a less impact on the economy than the past. They say Korea now exports to more various countries like China than before and has significantly improved the quality of its products.

Indicators show that since 2004 Korea’s export has continued two-digit increases – 31.0% in 2004 and 12.2% in 2005 – amid the decreasing exchange rate.

But what matters is that the speed of the won-yen exchange rate fall is too fast to sustain the economy.

Jeong Young-sik, an economist of SERI predicted, “If the appreciation of won and the falling trend of the won-yen exchange rate continue, they will seriously hamper Korea’s overseas trade, especially high-value industries competing with Japan.”