South Korea’s next leader will face a currency war

December 19, 2012

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Andy Mukherjee

Every new South Korean president has to contend with sabre-rattling by Pyongyang. It won’t be any different this time. North Korea’s recent rocket launch shows just what kind of reception the next occupant of Seoul’s Blue House can expect from across the demilitarized zone.

But a bigger challenge for the winner of today’s presidential poll may be to protect the five-year slide in the won, which has fallen by 42 percent against the yen. That won’t be easy. New Japanese Prime Minister Shinzo Abe looks set to make good on his promise of “unlimited” monetary easing. A cheaper yen could see South Korea’s export advantage erode, or even disappear.

Samsung’s recent success relative to Sony is down to more than just the currency. But the bilateral exchange rate between Korea and Japan matters because of the strong price competition between the two countries’ auto and electronics exporters. In the past few years, the advantage has been with Korea: While one yen changed hands for 8 won or less in 2007, it hasn’t traded lower than 12 won since the financial crisis.

Any strengthening in the won would come at a time when the economy is performing below potential. A recovery in exports is crucial for countering sluggish domestic demand. With household debt at 70 percent of GDP in the third quarter, overleveraged consumers will be unable to pick up the slack if demand from overseas sputters.

Conglomerate-bashing is an added risk. During the campaign, both Park Gyun-hye and her rival Moon Jae-in railed against the economic power of the country’s chaebols. That’s worrying, because the likes of Samsung and Hyundai account for an overwhelming share of the nation’s exports. One of the new president’s tasks will be to temper expectations about reining in the large groups, or breaking them up. Upsetting the established economic order when global demand is anaemic and an economic rival is poised for currency war would be folly.

Belligerent noises from Pyongyang are an understandable concern. But the won’s 14 percent rally against the yen in the past three months should worry the incoming president as much as a rogue neighbour.

 

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