Decoupling of won from yen seen easing in 2006

By Kim Jung-min



The Korean won`s decoupling from the Japanese yen is expected to weaken in the coming year, meaning that the Japanese currency is likely to strengthen against the Korean won, a think tank said yesterday.

The won`s latest rally against the yen has made it harder for local exporters to compete with their Japanese counterparts in overseas markets, the Korean Institute of Finance said in a report on the trends and prospects of global financial markets.

The won gained value against the yen by 13.5 percent as of Nov. 21 compared with the end of last year. Other key Asian currencies also appreciated against the yen during the same period.

Yet this trend is likely to reverse next year, with the yen gaining value agaist the Korean won. But this reversal would also expose local firms to a higher level of foreign exchange risk, the institute said.

"Companies which took yen-denominated loans should hedge against the currency risk," said a KIF researcher Park Jae-ha, calling for the need to increase won-yen transactions in the local currency markets. The won-yen trading volume totaled $411 million in the third quarter, comparing with the won-dollar trading of $16.31 billion.

Yen-denominated loans provided by Korean banks rose nearly 5 percent in the third quarter from three months earlier as the Japanese currency fell against the won, financial sources say.

Local lenders made $9 billion in yen loans in the third quarter, up 4.7 percent from a quarter earlier after the yen dropped against the won. A weaker yen makes debt repayments cheaper for local borrowers.

Yen-denominated lending by local banks fell throughout 2004 and until the second quarter of 2005.

Along with the wider liberalization of the foreign currency market, a shift in the fresh global capital inflow into the European Union and Japan away from the emerging markets is expected to put downward pressure on the won next year, the KIF said.

In contrast, the Japanese yen, which has remained weak this year, is expected to rally on rising expectations for an economic turnaround and global capital inflow into the equity markets.

The effects of the yuan`s revaluation on the Asian currencies including the won appear to be limited so far, the institute said.

Economic policymakers are highly concerned about the won`s strength against the yen in recent weeks. A gain in the currency makes Korean goods more expensive in overseas markets where local companies compete with Japanese counterparts.

The won gained for a third day against the yen to 8.73 on Friday. The currency rallied to 8.67181 on Nov. 16, the highest since Aug. 19, 1998.

Last week, the won lost its value by 0.5 percent against the dollar, its first weekly loss in three as overseas investors sold the currency to take home the proceeds from stock sales. Currency traders also sold the won on anticipation that the central bank may sell its currency to curb the advance against the yen.

Vice minister of Finance and Economy Kwon Tae-shin said last week that the government would take measures in the currency market to slow the won`s rise against the yen.

Globally, additional rate increases by central banks of the major economies would induce global investors to reallocate their investments into the U.S. bond market and Japanese and European equity markets away from the emerging markets, the KIF said.

"The U.S. dollar carry-trade" has prompted global investors to flock into the Asian equity markets including India and Korea since 2003,갚 said a KIF researcher Ha Jun-kyung said.

The "carry-trade" is a trading, investment or hedging strategy that involves borrowing funds in a low-interest rate market and purchasing an offsetting position in a high-interest rate market.

A low interest rate has induced many global traders to borrow in U.S. dollar and invest in the Asian markets to secure a higher return.

(jungmin@heraldm.com)