Weak Korea exports? Don’t blame the yen

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Jung Yeon-Je | AFP | Getty Images

While weakness in South Korea's exports may get laid at the feet of the weak yen, the real cause is likely to be found further afield, Capital Economics said.

"Given the similarity of many of its exports to Japan's, Korea looks the most vulnerable" to the yen's latest bout of weakness following easing measures by the Bank of Japan," Gareth Leather, an economist at Capital Economics, said in a note Monday. "However, it is probably wrong to blame the poor recent performance of Korean exports on the weak yen."

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In October, South Korean exports rose 2.5 percent from a year earlier, bolstered by demand from the U.S. and China even as EU demand slackened, but some analysts viewed the extent of the improvement as a disappointment. The yen has lost around 10 percent of its value against the U.S. dollar since the beginning of September.

But correlation isn't causation, Leather notes.


"If a weak yen was helping Japanese exporters to gain market share over their Korean competitors, then we might have expected to see Korean exports underperform exports from the rest of Asia," he said. "In fact, exports from the rest of the region have performed even worse than Korean exports since the yen began its plunge."

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In addition, Japan's exporters don't appear to be using the weak yen to boost competitiveness in global markets and are instead keeping the dollar prices of their products stable, Leather said.

"More than half of Japan's electronics exports are priced in foreign currency, and they have fallen in volume terms in the last two years," he said.

Leather expects that sluggish demand globally is putting the kibosh on South Korea's exports, not the yen, but that may not keep the Bank of Korea from acting on concerns when it meets this week.

"It will certainly add to pressure on the Bank of Korea to put downward pressure on the won and keep interest rates low," Leather said, noting the central bank has already cut rates to an all-time low of 2.0 percent.

Others also expect the BOJ's efforts may push South Korea's policy makers to ease, even if the impact on exports isn't clear cut.

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"In the longer-term, trade competitiveness will be primarily determined by fundamental factors, such as productivity and technology. The role of exchange rate movements, especially in the medium-term, shouldn't be exaggerated," DBS said in a note last week.


But DBS expects a sharp rise in the won against the yen, accompanied by lackluster exports, would pressure the Bank of Korea (BOK) to cut rates even further. In a separate note Monday, DBS said it doesn't expect the BOK will act this week.

"The rebound in household debt growth in the past few months, immediately following the decline in borrowing costs, would spark policymakers' concerns about the side effects of aggressive monetary easing," it said. But it expects the BOK to adopt a dovish tone Thursday, with pressure for rate cuts likely to rise in the months ahead.

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DBS isn't alone in expecting the BOJ's massive easing will weigh on the BOK's mind.

"We suspect more fiscal and monetary expansion is likely to be implemented in the future, with the aim of supporting domestic demand. This would help exert depreciation pressure on the South Korean won, helping to offset the impact from yen weakness," Credit Suisse said in a note Monday. It expects the U.S. dollar will be fetching 1,100 won by the end of the year, compared with around 1,084 won currently.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1