South Korean Finance Minister Choi Sang-mok and Japanese Finance Minister Shunichi Suzuki have expressed serious concerns about the sharp depreciation of the yen and won. In a joint statement, they vowed to take steps against excessive and disorderly foreign exchange moves, citing increased volatility in the currency market as casting uncertainty over the economic outlook [fd023783].
The finance chiefs of Japan and South Korea discussed the issues related to the weakening yen and won. The yen has fallen about 11 percent against the dollar this year, while the won has depreciated around 8 percent. Both countries are worried about the negative impact of the weakening currencies on their export industries. A weaker currency can make exports more competitive, but it can also lead to higher import prices and inflation [93131862] [fd023783].
South Korea has recently made efforts to improve foreign investor accessibility, which were welcomed by Japan. In particular, South Korea expanded its currency swap with the National Pension Service to $50 billion from $35 billion to defend the won against the dollar [93131862]. Last year, the two nations revised a currency swap agreement that provides funds, such as U.S. dollars, to each other in times of emergency [fd023783].
The joint statement by the finance ministers of South Korea and Japan may fuel speculation of a coordinated intervention between the two countries to stabilize their currencies. This shows their commitment to maintaining stability in their respective economies [93131862].
In addition to the currency concerns, the two sides also discussed issues related to nuclear-armed Russia and North Korea [fd023783].
The Bank of Korea has warned of the possibility of stronger downward pressure on the won currency. The central bank stated that it will increase monitoring of risk factors and take necessary steps to stabilize the markets. The major risk factors cited for the currency include a pushback in expectations for US interest rate cuts, geopolitical conflict in the Middle East, and weakness in the Japanese yen. The bank also highlighted the exposure to real estate project financing as a major risk factor for the country's financial system. It stated that while there is a low possibility for real estate-related risks to turn into systemic issues, default risks have increased for real estate projects. The Bank of Korea will strengthen monitoring of external and internal risk factors and cooperate closely with other authorities to tackle unexpected market instability factors [8c5d28e2].
The weak Japanese yen could negatively impact the South Korean economy by making Korean exporters less competitive in terms of price and undermining Korea's trade surplus. The export similarity index between Korea and Japan is high in sectors such as petrochemicals, automobiles and parts, ships, and machinery. A report by the Korea Economic Research Institute found that for each percentage point of depreciation in the yen, the rate of change in Korea's export value decreased by 0.61 points. The expanding tourism deficit with Japan is also expected to eat away at South Korea's current account surplus. There are concerns about a coupling effect where a falling yen would drive down the Korean won. The Bank of Korea has pointed to a proxy effect triggered by a devalued yen. Experts warn that a long-term devaluation of the yen will be deleterious for Korea's businesses and industries. The Japanese government selling its overseas assets and pursuing aggressive austerity measures to defend the yen's value could hit Korean financial markets hard [b335b0e5].