South Korea has accused other countries of allowing their currencies to weaken through economic policies and underscored that a currency must be driven by market forces instead.
Korean finance minister Bahk Jaewan made the comments during a plenary session at the Asian Financial Forum in Hong Kong on January 14, immediately after Japanese finance minister said that his country will not try to devalue the currency intentionally. At the same time Bahk said the appreciation in the Korean won was “too rapid” and that his government is determined to launch additional macro-prudential measures to curb speculation on its currency.
“I won’t be impolite to comment on the currency policies of the other governments but…the foreign exchange rate should be determined in accordance of the demand and supply of the foreign exchange market and also in accordance with the fundamentals with each economy,” said the Korean minister. “We have witnessed several cases in which some governments’ policies led to currency wars or exchange rate wars such that the global economy was affected significantly.”
The Korean won gained 8.3% in 2012, the strongest currency performer in the Asia Pacific region against the US dollar. Meanwhile, the Japanese yen has been rapidly depreciating this year.
Newly-elected prime minister Shinzo Abe is exerting pressure on the Bank of Japan to agree to raising its inflation target to 2% by the end of 2014 from 1% by end-2013 in a bid to boost the country out of an economic rut. Japan is also in the process of easing monetary policy, which was last expanded by ¥10 trillion yen (US$123 billion) to ¥101 trillion last month.
Abe’s pledge has helped the yen tumble more than 10% since September. It traded at 89 against the dollar at the time Asiamoney PLUS went to press, a 30-month low.
“Of course the prime minister's very strong remarks of about his commitment to get out of deflation and also [the] negative impact of deflation might have triggered, might [have] help triggered this kind of adjustment,” said Japanese finance minister Takehiko Nakao, who spoke right before Bahk. “But it's not the only reason.”
“This is [a] correction from previous excessive appreciation and prime minister Abe and the new cabinet don't have any intention of competitive devaluation so this is [a]reflection of all the fundamentals and also the commitment to easing monetary policy.”
Currency appreciation is a sensitive topic for South Korean government officials and companies, as a stronger Korean won makes its exports such as electronics and cars more expensive in overseas markets such as the US. The strong yen gave companies such as Korean companies such as Samsung Electronics a competitive edge against its Japanese counterparts, while hurting profit margins at Sony and Panosonic.
South Korea has introduced macro-prudential policies such as bank levies and ceilings on banks’ FX forward positions since the 2008 global financial crisis to curb rapid capital outflows, which had generated volatility in its currency.
“If it’s appropriate we will review the effectiveness of these sets of macro-prudential measures and may step up the magnitude of the macro-prudential measures if it’s absolutely necessary,” said Bahk. “Since most Asian currencies do not have a reserve currency, they are vulnerable to external shocks.”