WHEN Japan set its inflation target and declared a change in its monetary regime for a weak yen, global investors and economists took this as a sign that currency wars would soon be launched to aid the economy, especially the export sector.

Japan’s weak yen policy, aimed at pulling its economy out of deflation and recession, became one of the hottest topics at the recently concluded World Economic Forum in Davos, Switzerland.

Japan’s Finance Minister Taro Aso told reporters that its central bank was not pressured to do anything in regards to the currency exchange rate, while European leaders warned Japan against currency manipulation.

“I don’t want to say that I look towards Japan completely without concern at the moment,” German Chancellor Angela Merkelreportedly said at the Davos forum, which wrapped up on January 26.

She accused Japan of getting its central bank to ‘clean up political bad decisions’.

Japan’s Aso, in response, said via media that she was ‘completely off the mark’.

Korea, which also favours a weak currency to aid exports, did not stand by its usual ‘wait and see’ approach and immediately expressed concerns and doubts over Japan’s monetary easing, saying that it may be “effective in the short term, but would be costly in the long run”.

The Bank of Korea and the Strategy and Finance Ministry even publicly said they would counter any possibilities of won appreciation through currency intervention, as a strong won severely affects the country’s main growth driver ¯ exports.

Ha Sung-keun, a member of the BOK monetary policy committee, said that Japan’s monetary easing was adding to market unease and that it is appropriate to call the current situation a ‘currency war’.

“A strong won would raise concern among foreign investors especially the automotive sector,” said Lee Sang-won, an equity strategist at Hyundai Securities.

Analysts in Korea suggest that the government is likely to step in and weaken the won when the exchange rate hits around 1,050 won per dollar, which is not likely to generate a favourable response from the international community either.

“In any economy that has floating exchange rate regime, an intervention is not seen as an appropriate policy measure,” Lee Ji-hyung, an forex analyst at Woori Investment & Securities. “In Japan’s case, the country is getting the spotlight as its weak yen policy has been more politically driven.”

Neither the US nor the European Union, which is leaning on exports to overcome its fiscal crisis and spur employment, reacted favourably to Japan’s policy.

Even China, which had long been branded by the US as a currency manipulator for fixing its exchange rate for a weak yuan to maintain robust exports, urged G20 economies to ‘communicate and coordinate’ to prevent all-out currency wars, as Yi Gang, deputy governor of the People’s Bank of China, told the media in Davos.

Currency wars are likely to linger for the time being, critics said, as policies for a weak currency concern all economies that are trying to overcome joblessness.

China hinted that issues such as trade protectionism may breed out of this latest development and will be dealt with further at the upcoming G20 summit.

Group of 20 leaders are expected to meet in Russia in September. But analysts suggest the markets should expect no concrete deals to be reached over monetary policy, as it is unlikely that any country will make the type of sacrifice once seen in the 1985 Plaza Accord where Japan agreed to strengthen its currency against the dollar to offset global trade imbalances.

South Korea: More than half of the top 50 export items from South Korea and Japan overlapped in 2012, raising concern over a possible sharp fall in the nation’s outbound shipments amid the weakening Japanese yen, according to a research institute.

The duplication rate of Korea and Japan’s top 50 export items hit a record high of 52 per cent in 2012, LG Economic Research Institute, or LGERI, said based on trade data from the Korea International Trade Association.

The rate started to soar in the early 2000s. In 2000, only 20 per cent of the top 50 export items between the two countries overlapped, but the rate surged to 40 per cent in 2002 and reached 50 per cent in 2006 for the first time. The overlap continued to increase over each of the past 10 years except 2010.

“The degree of overlapping deepens in the top 10 of export items. About 90 per cent of the top 10 export items of the world’s ninth-largest exporting country overlapped with those of Japan,” the LGERI report said. The top nine made-in-Korea products in competition overseas with Japanese goods include electric and electronic goods, machinery products, cars, ships, plastic goods, steel, precision machinery and organic chemistry goods.

Industry watchers forecast Korea could take a big hit from the continued rise of the won’s value, in particular against the yen due to the two countries’ similar industrial strengths.

“Korean cars could fall victim in the recent currency war as local carmakers need more time to secure a competitive edge over Japanese cars in product quality,” analyst Kang Doo-yong from the Korea Economic Research Institute said. “Overseas consumers are likely to turn their eyes to cheaper Japanese cars.”

Hyundai Motor’s dependence on overseas sales has increased. The nation’s flagship auto brand sells six out of 10 vehicles abroad.

“Contrasting with cars, the strong won is expected to deal a smaller blow than expected to such industries as the semiconductor and electronics industries as Korean brands in these areas have differentiated themselves from Japanese rivals,” Kang said.—ANN/ The Korea Herald