The Korea Herald


[Editorial] Japan and prices

By 최남현

Published : March 20, 2011 - 18:35

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Japan’s devastating disasters are pummeling the Korean currency. The weak Korean won will raise the prices of imported commodities, which will work their way down to consumer prices. Moreover, political instability in the Middle East is pushing up oil prices.

All these developments will accelerate increases in consumer prices. The threat to price stability is being renewed at a time when housewives are already feeling the pinch. As such, the central bank does not have to bother to tell the nation that consumer prices will rise at a faster pace, at least for the time being.

Nonetheless, Kim Choong-soo, governor of the Bank of Korea, said last week that inflation would rise in the months ahead. He added that inflationary pressure will be higher in the first half of this year than in the second.

As he said, Korea needs a new set of macroeconomic and monetary policies to stop cost-push inflation from spilling over to wages and others. Few would dispute his prescription. But he appeared to have forgotten that he himself is the chief inflation fighter when he fell short of presenting an anti-inflation plan.

The consumer price index has already broken through the 4 percent limit set by the central bank ― 4.1 percent in January and 4.5 percent in February. But all that the central banker did was wring his hands after taking baby steps on two occasions ― increasing the benchmark rate by 25 basis points in January and again by the same margin earlier this month.

As the central banker watched the consumer price index shoot through the roof, the prices of imported goods gained 16.9 percent year-on-year last month, the highest in two years. The increase was led by the prices of commodities, such as raw cotton (98.7 percent), wheat (77.2 percent), natural rubber (65.5 percent) and iron ore (98.9 percent).

Worse is yet to come, given that the February prices of imported goods did not reflect the impact of Japan’s earthquake, tsunami and nuclear crisis on the value of the Korean won. The plunge in the won’s value, which followed the Japanese disasters, will certainly raise the prices of imported goods even further.

Still, intervention is out of the question. If it was wrong for the government to attempt to push down the strengthening won, as it did in the past to promote exports, it would be equally wrong to take steps to prop up the weakening currency to rein in inflation. The government needs to wait the Japanese crisis out. Moreover, the consensus among economic experts is that the nation’s international balance-of-payments surplus will eventually help the won firm up.

Even so, the specter of inflation will not go away. Instead, it will be made more pronounced by the disruption in the supply of Japanese parts and components, on which Korea depends heavily for the manufacture of finished products. Inflationary pressure will come from elsewhere, too.

When Japan starts reconstruction, prices of many imported goods will go up in Korea. Among the goods are oil and petrochemicals.

Economic experts say oil prices will further strengthen because Japan will increase oil imports for thermal power generation to make up for a loss in nuclear-generated electricity. With operation suspended at many of its petrochemical plants, they say, Japan will also have to buy more petrochemicals from abroad, raising their prices in the world markets.

In other words, Japan’s crisis will undoubtedly accelerate global price increases. Korea can hardly shield itself from the impact by taking such baby steps as intermittent 25-basis-point rate increases. The central bank will do well to take a bold monetary policy initiative if it wishes to tame the inflation that has already started to rear its ugly head.