Korean exporters’ yen nightmare (corrected)

January 17, 2013

(corrects name of hedge fund in para 3 to Symphony Financial Partners)

Any doubt about the importance of a weaker yen in thawing the frozen Japanese economy will have been dispelled by the Nikkei’s surge to 32-month highs this week. Since early December, when it became clear an incoming Shinzo Abe administration would do its best to weaken the yen, the equity index has surged as the yen has fallen.

Those moves are giving sleepless nights to Japan’s neighbours who are watching their own currencies appreciate versus the yen. South Korean companies, in particular, from auto to electronics manufacturers, must be especially worried. They had a fine time in recent years  as the yen’s strength since 2008 allowed them to gain market share overseas. But since mid-2012, the won has appreciated 22 percent versus the yen.  In this period, MSCI Korea has lagged the performance of MSCI Japan by 20 percent. Check out the following graphic from my colleague Vincent Flasseur (@ReutersFlasseur)

David Baran, co-founder of Tokyo-based Symphony Financial Partners, notes the relative performance of Hyundai and Toyota (Hyundai shares have fallen 2.5 percent this year adding to 13.5 percent loss in the last quarter of 2012. Toyota on the other hand is up 5 percent so far in 2013 after gaining 31 percent in Oct-Dec last year). Baran says he has gone long the Nikkei and short the Seoul index (the Kospi) and (Hong Kong’s) Hang Seng, while taking a short position on the yen. He says:

Dollar/yen went from 125 to 77 at the exporters’ expense and the Koreans benefited massively from this. Now, if we get a situation where the yen goes into the mid-90s or lower, Japanese corporates will be fantastically profitable and that’s what people are starting to build into equity  allocations. The feeling is that greater damage will be towards Korean exporters in favour of the Japanese.

Analysts at Morgan Stanley predict the won may appreciate another 10 percent  against the yen by year-end. But they are less worried about the outlook for Korean exporters, telling clients this week that unless the yen/won cross depreciated another 30 percent, Korean exports would not be structurally undercut.

The reasons? Many Korean companies have moved production overseas to countries like Thailand and India and are therefore less reliant on the won’s exchange rate. Second, Korean exports compete less with Japan’s than in the past. (“Think more Samsung v. Apple, not v. Sony,Morgan Stanley tell clients) . Lastly, the global growth cycle appears to be finally turning, they say:

BoJ-induced currency strength…is likely to undercut Korean exporters’ earnings in the short term. However, as the pace of currency decline eases, we expect global growth to outweigh any concerns related to reduced export competitiveness vs. the Japanese.

For now, foreign cash is headed for Japanese shares. Fund tracker EPFR Global say inflows  hit a 20-week high last week while Bank of America/Merrill Lynch’s monthly investor survey shows global equity funds went overweight Japan in January for the first time since mid-2011.

Eventually, what this means is that the Bank of Korea — and others in Asia — will have to act to support their own export sectors. Expect more currency wars in the months ahead.

As Moscow takes up the helm of the G20 grouping this year, Russian central banker Alexei Ulyukayev said on Wednesday: “We’re on a threshold of a very serious, confrontational actions in the sphere that is known … as currency wars.”



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