Freefall Continues for Korean Won, Stock Market

The Korean stock market KOSPI yesterday fell below 1,000 for the first time since June 2005. Bond prices plummeted and the won also plunged against the U.S. dollar.

Japan’s benchmark Nikkei 225 fell 9.6 percent to close at 7,649.08, as fears spread over the global financial crisis dealing a serious blow to export-dependent Asian nations.

The Korean government and the Bank of Korea rushed to ease jitters by pouring two trillion won (1.38 billion dollars) into domestic brokerages and asset management companies. A government official warned that stagnant third-quarter growth of around three percent could result in a collapse of asset prices, a sharp drop in consumption, and accelerated slowdown in the real economy, which in turn will speed up the fall in asset prices.

The KOSPI fell 110.96 points from a day ago (10.57 percent) to close at 938.75, setting a new yearly low. The tech-heavy KOSDAQ dropped 32.27 points (10.45 percent) to close at 276.68, shattering all the previous record.

The won-dollar rate jumped 13.2 points to close at 1,422. The benchmark five-year government bond yield soared to 5.06 percent but after the central bank decided to inject two trillion won, the yield closed at 4.9 percent, up two basis points from Thursday.

In an unprecedented move, the Bank of Korea announced an injection of two trillion won into securities and asset management companies via repurchase agreements with a maturity of 28 days. The two trillion won will probably see an impact when 50 trillion won (34.6 billion dollars) is invested into institutional investors.

The real economy has contracted much faster than expected due to the global financial crisis. A sharp fall in asset prices amid depressed income and rising interest rate has lowered consumption, which accounts for 49.3 percent of GDP, and corporate investment.

According to a report released by the central bank yesterday, real GDP in the third quarter increased 0.6 percent from a quarter ago and jumped 3.9 percent. Quarter-on-quarter growth in the third quarter also set a new low since the third quarter of 2004, when growth reached 0.5 percent. The year-on-year growth rate in the third quarter set a new low since the second quarter of 2005, when real GDP rose 3.5 percent.

As the terms of trade worsened due to surging prices for oil and raw materials, real gross domestic income in the third quarter fell three percent from the second, the biggest fall since the first quarter of 1998, when real GDI plunged 8.7 percent.

Given the stock plunge this month, the negative asset effect, under which declining asset values worsen consumption capabilities, will make its effects felt next year. Experts predict that Korean’s economic growth will fall to around three percent.

parky@donga.com jefflee@donga.com