The exchange rate of the yen against the dollar has surpassed 163 yen, reaching its highest level in 40 years since 1986. This rise in the exchange rate indicates a significant drop in the value of the yen, commonly referred to as a 'super yen weakness.' While this situation exacerbates import prices and household burdens in Japan, it also poses challenges for the South Korean economy. The depreciation of the yen diminishes the export competitiveness of South Korean companies and adds downward pressure on the value of the won.
Recently, the won has also weakened against the dollar, but the yen is declining at a faster rate. Despite the lower value of the won, South Korean products are becoming less price-competitive compared to Japanese products. As South Korea imports crude oil, gas, and raw materials at high dollar prices, it must compete with Japanese companies benefiting from the yen's depreciation. This situation results in simultaneous cost burdens and weakened export competitiveness.
South Korea and Japan compete in various sectors, including automobiles, steel, machinery, petrochemicals, as well as advanced manufacturing industries such as semiconductor equipment, batteries, robotics, and defense. If the yen's weakness persists, Japanese companies may lower their overseas selling prices or reinvest the increased profits from the exchange rate effects into research and development and facility investments. In contrast, South Korean companies may have to lower prices to maintain market share, sacrificing profitability in the process. Smaller export firms are likely to feel the impact more acutely.
Some argue that the quality and technology of South Korean companies have improved, reducing the impact of yen depreciation compared to the past. However, in industries where price competition is crucial, such as automotive parts, machinery, and materials, exchange rate differences directly affect order competitiveness. If Japanese companies offer similar products at lower prices, the incentive for clients to choose South Korean firms diminishes.
The yen's weakness also exerts downward pressure on the won. In international financial markets, the won and yen often move together as Asian currencies. If the yen continues to decline, foreign investors may increasingly sell the won, viewing it as a weak currency. In times of global financial market instability, the won's depreciation could worsen.
While a further decline in the won could provide some benefits for exports, the losses may outweigh the gains. Rising import prices for crude oil, gas, and grains, along with increased costs for companies to procure foreign currency, could exacerbate the burden on living costs, making it even more challenging to recover from already sluggish consumer spending.
The Bank of Korea's monetary policy becomes more complicated. While there may be a need to lower interest rates based on economic conditions and domestic demand, the depreciation of the won and rising import prices make it difficult to act hastily. Conversely, maintaining high interest rates for an extended period to defend the exchange rate increases the interest burden on households, self-employed individuals, and small businesses. The super yen weakness is narrowing South Korea's monetary policy options.
The government should not solely focus on defending the exchange rate. Interventions in the foreign exchange market are merely temporary measures to prevent rapid fluctuations and do not address the underlying gaps in industrial competitiveness. It is essential to assess sectors heavily impacted by yen depreciation and expand foreign exchange fluctuation insurance and policy financing. Support for small and medium-sized enterprises with high import ratios of raw materials is also necessary.
More importantly, companies must create structures that are less susceptible to exchange rate fluctuations. While Japanese companies invest the profits gained from yen depreciation into technology development and investment, South Korean firms should not be hindered by high interest rates, regulations, and sluggish domestic demand. If South Korean companies fail to enhance core technologies and productivity, the competitiveness gap will persist even after exchange rates normalize.
The current exchange rate structure, where the won is weak but the yen is even weaker, presents the most challenging combination for South Korea. Import prices are rising while export competitiveness is declining, and exchange rate instability is constraining monetary policy. The super yen weakness should not be viewed as solely a Japanese issue; it must be recognized as a complex risk factor for the South Korean economy that requires proactive responses.
* This article has been translated by AI.
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