Park Geun-hye warns South Korean companies on weaker yen

January 6, 2014 11:30 am

Park Geun-hye warns South Korean companies on weaker yen

By Song Jung-a in Seoul

Park Geun-hye, South Korea’s president, has stressed the need to rebalance Asia’s fourth-largest economy towards domestic consumption as a weaker yen in Japan threatens the country’s export competitiveness.Ms Park said Korean companies should respond to the unfavourable currency environment by cutting costs and restructuring to strengthen their competitiveness as the Korean won last week hit the highest level against the Japanese yen in more than five years.

“The weaker yen is a burden for Korea but crisis can be turned into opportunity,” Ms Park said in her first press conference since taking office almost 12 months ago.

She presented a three-year economic development plan focused on advancing the under-developed service sector and restructuring debt-laden state-run companies. She was hopeful that the plan would help boost growth potential from 3.5 per cent to 4 per cent in three years, increase per-capita income from $24,000 to $40,000 and lift the employment rate from 65 per cent to 70 per cent.

Her comments came amid concern over the yen’s continued depreciation – the result of the policies of Shinzo Abe since he became Japan prime minister 12 months ago – which puts Korean exporters at a disadvantage in competing with Japanese rivals in areas including cars, ships and electronics. The won gained 22.5 per cent against the yen last year as Japan undertook massive monetary stimulus.

Despite the currency rates, South Korea expects its exports to increase the most this year since 2011 on strong shipments of mobile phones and cars. The trade ministry forecast a 6.4 per cent growth in 2014 exports, from an estimated 2.2 per cent rise in 2013. South Korea’s exports rose 7.1 per cent in December from a year earlier on improving demand from the US and China.

However, concerns remain about the negative impact that the weaker yen will have on exports. A Bank of Korea board member said last month that currency volatility posed the biggest risk for economic recovery and exports will see “significant” impact if the yen falls further.

Ms Park suggested rebalancing the economy towards consumption from exports would be a fundamental solution to reducing exposure to external risks. “It has become evident that exports of manufactured goods alone cannot create more jobs and boost domestic demand,” she said, promising to ease regulation in the service sector and expand support for small and midsized companies.

Goldman Sachs predicted on Monday that South Korea’s central bank could cut interest rates “in the near term” as the stronger won was contributing to tighter monetary conditions.

“Financial conditions of Korea are getting tighter too rapidly on currency appreciation, rising interest rates and weak stock markets, potentially undermining the recovery momentum,” Kwon Goo-hoon, economist at Goldman Sachs, said in a report. “In particular, the recent won appreciation against the yen seems to run ahead of the recovery cycle.” The central bank will hold its January monetary policy board meeting on Thursday.