The global economy is likely to face a currency war this year, triggered by Japan's drive to weaken its currency through an open-ended asset-buying program, a central bank policymaker said Monday.
"It is not an exaggeration that the global economy will face a currency war. An atmosphere of protectionism is spreading," Ha Sung-keun, a policymaker on the seven-member monetary policy committee of the Bank of Korea (BOK), told reporters.
Japan's drive to weaken its currency aimed at propping up its fragile economy is putting upward pressure on the Korean currency, which is feared to hurt Seoul's exports.
“The Korean economy is still vulnerable to cross-border capital flows although it has drawn up a set of macroprudential measures to smooth out excessive capital movement," he added.
Ha said that the current measures are not enough to cope with volatile foreign capital flows, voicing the need to seriously tackle this issue as Korea heavily depends on external economies.
Meanwhile, he said that the global economy remains stuck in a downturn and has yet to show signs of improvements, casting doubts about the recovery of the Korean economy.
"Some are optimistic that there are signs of economic improvements, but I think that there is a high possibility that the global economy may have difficulty in escaping from the downturn phase," Ha added.
He likened massive credit easing moves by advanced economies to "curing a hangover with a hair of the dog."
"The global economy is creating another bubble following a bust of bubbles without making fundamental and structural changes," he added.
His remarks came as market players are betting on a rate cut in the first quarter amid mixed signals about the economy and the local currency's relentless ascent to the yen.
The BOK froze the key interest rate at 2.75 percent for the third straight month in January while it cut the 2013 growth outlook to 2.8 percent from 3.2 percent.
Asia's fourth-largest economy grew 2 percent last year, the slowest gain in three years as exports and domestic demand remained weak amid the global slowdown. (Yonhap News)