Sunday, February 3, 2013

Currency wars can be quite effective

Many in the mass media continue to be confused about the concept of currency wars and any tangible effects such policies may have. Here is an example of how real the impact can be. Below is a chart of the JPY/KRW currency cross - the number of South Korean won per one Japanese yen.

JPY/KRW

As Japan went on its devaluation campaign via monetary easing (see discussion), it's export sector quickly obtained a competitive advantage over its Korean rivals. The markets immediately rewarded Japanese firms with significant outperformance over their Korean counterparts. The two markets, which generally traded in tandem (except for a brief period last spring), have now diverged dramatically.

KOSPI (blue) vs. NIKKEI225 (red)

The impact of yen's depreciation on Japan's industries was swift and potent, creating anxiety among South Korean businesses while encouraging Japan to keep driving the yen lower.
Bangkok Post: - A surging won and waning yen are eroding the bottom lines of South Korea's export powerhouses who are feeling the pinch after years of gobbling up global market share from their Japanese rivals.

A bank employee counts out South Korean won banknotes at the Korea Exchange Bank in Seoul. A surging won and waning yen are eroding the bottom lines of South Korea's export powerhouses who are feeling the pinch after years of gobbling up global market share from their Japanese rivals.

The South Korean currency has soared 27 percent against the yen since the beginning of 2012, as anticipation of monetary easing promised by Japan's new leader Shinzo Abe weakened the yen across the board.

And the won gained 8.6 percent against the US dollar over the same period, touching a 17-month high of 1,054.49 on January 15. In contrast, the yen slumped this week to its weakest level against the greenback.

The trend is being watched anxiously in business circles in South Korea, where overseas sales account for nearly half of the country's export-reliant economy.

In the past decade South Korea has made sizeable inroads into Japan's export market where the two countries compete head-to-head in the electronics, auto, shipping and steel product sectors.

While only 20 percent of their top 50 export products overlapped in 2000, the figure now stands at more than 50 percent, according to data from the state-run Korea Trade-Investment Promotion Agency. "The impact of the weak yen will have a limited impact on IT industries like smartphones where South Korea has a wide lead," said Shin Hyon-Soo of the Korea Institute for Industrial Economics and Trade.
At some point South Korea as well as other nations in the region will "retaliate" by attempting to weaken their own currencies, launching the next chapter in the currency wars.



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