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A worker at Hana Bank’s counterfeit currency response center in Seoul stacks bills from Japan and the US on June 27, 2024. (Yonhap)

With the Japanese yen at a 38-year low, there are growing concerns that the weak yen could negatively impact the South Korean economy as well. For one, it could make Korean exporters with Japanese rivals less competitive in terms of price and undermine Korea’s trade surplus. Some warn that if the Korean won depreciates alongside the yen, the risk could cascade throughout the Korean financial market.

According to an analysis released by the Korea International Trade Association on Thursday, Korea and Japan had an export similarity index of 0.458 in the global market (as of 2023). The closer the index is to 1, the fiercer the competition; generally, an index of 0.5 or above is considered high.

Korea and Japan’s export similarity is particularly high in what have traditionally been the two countries’ leading export sectors, including petrochemicals (0.827), automobiles and parts (0.658), ships (0.653) and machinery (0.576).

A recent 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.

On Thursday, the won-yen exchange rate was down 3.23 won from the previous day, from 858.79 won to 855.56 won per 100 yen. The last time the rate was in the 850-859 range was in 2008.

While experts acknowledge that the export similarity between South Korea and Japan is going down compared to what it’s been in the past, they think a long-term devaluation of the Japanese yen will inevitably be deleterious for Korea.

“Although competition for exports is on the decline, there is actually a relatively high level of similarity in the shipbuilding and automotive industries,” said Kim Mee-roo, a fellow at the Korea Development Institute. 

“While the won is also falling in global forex rates, the continued hyper-depreciation of the yen could nullify and even reverse any competitive advantage we had gained in the global export market from a falling won,” Kim went on.

“Japanese firms are lowering their unit costs in alignment with falling yen values to maximize their operating profits,” said Baak Saang-joon, a professor of macro and monetary economics at Waseda University, at a seminar hosted by the Federation of Korean Industries on Tuesday.

“If the value of the Korean won does not fall at the same pace as that of the yen, our businesses will not be able to avoid taking a hit in operating profits,” Baak added.

The expanding tourism deficit (outbound tourists outnumbering or outspending inbound tourists) is also expected to eat away at South Korea's current account surplus. According to data provided by the Bank of Korea (BOK), the country’s tourism deficit climbed to a five-year high last year at 12.53 billion won (US$9.1 million). Among this imbalance, the tourism deficit with Japan accounted for 3.38 billion won (US$2.45 million).

“Historically, our tourism deficit with the US was much larger due to students studying abroad and business trip expenditures, but since the yen began falling last year, our tourism deficit with Japan has been growing,” said a BOK insider. 

According to figures provided by the Korea Tourism Organization, a total of 2,999,901 South Koreans visited Japan between January and April of this year, a 45.1% increase compared to the same period last year (2,067,670).

Forex authorities and experts have expressed worries about a coupling effect, where a falling yen would drive down the won. To minimize or avert risk in a market where the yen is falling, global forex investors commonly resort to investing in the won and the yen simultaneously, a strategy known as proxy hedging, which would devalue the won. 

“The won's value commonly serves as a proxy for the currencies of neighboring countries, so we are closely monitoring the situation to see if the won is not being excessively devalued relative to our fundamentals,” said BOK Governor Rhee Chang-yong during a press conference in April.  

The BOK has pointed to a proxy effect triggered by a devalued yen in April, when the won-dollar exchange rate climbed to 1,400 won. 

“Korean firms and industries are running into obstacles amid the US-led initiative to restructure global supply chains. Add the long-term hyper devaluation of the yen to the mix, and you get significant losses on our side,” said Park Sang-hyun, an economist at Hi Investment and Securities. 

“To defend the yen's value amid a coupling of the won and the yen, if the Japanese government sells its overseas assets and pursues aggressive austerity measures, it will hit Korean financial markets hard,” Park added.

By Kim Hoe-seung, senior staff writer

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