It’s Getting Worse: JPY/KRW is Killing JapanInc

Could It Get Any Worse? Apparently, Yes
Toyota’s profits have plunged, and the Japanese giant has refused to release financial projections due to the supply-chain disruptions that have resulted from the tragic earthquake. The Financial Times article also briefly mentions Hyundai-Kia, and the tremendous market share growth over the past year. The Japanese auto-manufacturers vs Korean ones is being dictated by Korea, helped by the continuing strength in the JPY, and most particularly, the strong JPY/KRW exchange rate.

Earthquake is a Double Whammy for Toyota, et al
In addition to the massive infra-structure problems caused by the earthquake, the devastation has led to another phenomenon that also weakens JapanInc: Yen repatriation. What the (%*[email protected]$ is Yen repatriation? Well, Japanese insurance companies, and Japanese corporations will require Yen in order to pay for insurance claims and the rebuilding effort. In order to raise that amount of Japanese currency, Japanese entities will need to liquidate their Euro, USD-denominated assets, and convert them to Yen. This will increase demand for the Yen vis-a-vis other currencies. Increased demand will create higher prices for the Yen, simple as that. Stronger Yen results in more expensive Japanese products on the international marketplace, and lower profits for Japanese companies. The Seoul Gyopo Guide has pointed out this single fact as an important factor in explaining Korea’s continued economic strength since the financial crisis. Many Korean corporations have taken full advantage of this, although a near-incredible 36% still believe that the KRW is still too strong.

The Bank of Korea Gets Wiggle Room
It is obvious: the Bank of Korea has acted to keep the Korean Won weaker than it would otherwise be in the international marketplace. The BOK has had a difficult task in balancing uncertainties within Korea against rising, and perhaps even accelerating, inflation. However, with JapanInc’s continued challenges, the Bank of Korea can allow the Korean Won to rise yet further in order to ease the inflationary pressures on everyday Koreans, while not raising interest rates which would hurt other areas of the Korean economy. Simply refraining from open market selling of the Korean Won will do the trick. This will not ease inflation overnight: there is no silver bullet. However, this is the most prudent course of action so that the Bank of Korea can pay attention to the different aspects of Korea’s economy, companies and people alike.