Super yen's attack begins again

Quiz: What do the three best years for Korea's economy - 1987, with economic growth of 12.3%; 1995, with export growth of 30.3%; and 2011, with manufacturing growth of 7.3% - have in common?

The answer is a strong yen. Since the 1980s, Korea's economic boom has generally been accompanied by a stronger yen. As Korea and Japan have similar industrial structures, many products compete in the same international market. Therefore, the strong yen made Japanese products less competitive, enabling Korean exporters to seize the opportunity to grow.

But once the strong yen phase ended, things became quite difficult and painful. When the yen began to weaken in 1996, Korean companies' exports fell sharply. That year, the current account deficit reached a record high of $23 billion. The economy cooled rapidly, companies' debt burdens grew, and conglomerates such as Hanbo Iron & Steel collapsed one by one. The weakening of the yen eventually became one of the reasons that led the nation to fall into the 1997 Asian financial crisis.

The reason for this uncomfortable story is the resurgence of the weak yen. At the beginning of this year, the value of 100 yen ranged between 940 and 1,000 won, but it plunged to the low 900s last month and then further to the 800s earlier this month, resulting in what is being referred to as a 'super-low yen' phenomenon. The Korea Institute for Industrial Economics and Trade has estimated that a 5 percent depreciation in the won-yen exchange rate would reduce Korea's exports by 1.1 to 3.0 percent for that year.

However, the screams from Korean companies are not very loud at the moment. Some responses include statements like "We are competing less with Japan than in the past" or "The price of parts imported from Japan is lower." A striking example can be found in the semiconductor industry. While Japan once built a semiconductor kingdom in the 1980s, it has since neglected to invest in the sector, leading to the absence of major names in the Japanese semiconductor industry. In contrast, Samsung Electronics and SK hynix do not compete with Japanese products when exporting D-RAM, so there is no reason for them to be affected by the value of the yen.

The automobile sector, which has been hit hard by the low yen in the past, also seems relaxed. In the U.S. market, where Korean and Japanese automakers compete directly, Hyundai-Kia posted a 17% year-on-year increase in sales in the first half of this year, compared to Toyota's 0.7% decline in the same period. This is due to the increased marketability and brand value of Korean cars and Korea's lead in electric vehicles.

However, it is also true that no businessman would confidently say that “the Korean economy is free from the effects of the low yen.” That's because the uncertainties of a weaker yen are significant. In particular, small-and-mid-sized exporters that are not well-equipped to deal with currency risks may be directly affected. SMEs that export to Japan and receive payment in yen will see their profits shrink significantly. Sectors that fiercely compete with Japan, such as steel, chemicals, electronics, and components, will find themselves at a price disadvantage the longer the yen remains low. Given that Bank of Japan Governor Kazuo Ueda said last month, “Uncertainty in the financial markets is very high, so we will continue monetary easing patiently,” it is unlikely that the low yen will end anytime soon.

It is possible that an unexpected shock could occur two or three years down the road. Historically, Japanese companies have focused on increasing profits rather than growing market share by increasing export volumes when the yen was low. They have used the cash to invest in R&D and product innovation, effectively strengthening their fundamentals. When these investments start to pay off in two or three years, that's when the real crisis could arise for Korean companies.