A weaker yen against the won is overshadowing the nation's economy and adding pressure on the Bank of Korea to cut its key rate to address the fallout from the Japanese government's weak yen policy, analysts said Friday.
Further rate cuts seem to be the only option, with exporters losing price competitiveness and the economy haunted by the specter of deflation, they said.
The won/yen rate neared 900 won per 100 yen, which compares with 1,500 won per 100 yen in June 2012.
The Hyundai Research Institute warns that exports may decrease 8.8 percent from the previous year if the Korean currency remains highly valued against the Japanese currency.
An Ki-tae, an economist at NH Investment and Securities, said Korea has few options as Japan will continue with the quantitative easing.
He said that the won is facing pressure to strengthen against the yen. "It's because of the huge current account surplus. Japan also recorded a surplus in March, but not as much as Korea." He said the won/yen rate should go below 900 won per 100 yen when considering the current economic states of the two countries.
The economist said that the shock from the weak yen has been mild so far, but it is likely to worsen.
"While the yen has depreciated 33 percent against the dollar since the implementation of ‘Abenomics,' Japanese firms cut export prices by only 20 percent. They have more room for price cuts."
"If Japanese firms change their management strategy and slash their export prices (against the -> in) dollar, it would be a threat for Korean firms in terms of market share.
He said Korea is left with few options to deal with the weak yen. "If the government intervenes in the foreign exchange market, it will face a backlash by other economies. Then, the only option for the Korean government is to cut the key rate to devaluate the currency."
While some analysts warn that a key rate cut will worsen household debt, he said that is not a priority at the moment. "If the economy was in a normal condition, we could focus on the household debt problem. However, note that inflation is at zero percent when excluding the cigarette tax hike. We should be concerned over deflation and strengthening pressure on the Korean currency, not household debt."
The economist added that the key rate hike by the U.S. Fed wouldn't affect Korea as negatively as feared. "When the U.S. raised the key rate in 2004, for instance, there was an inflow of foreign funds to Korea's bond market and the won strengthened. I don't think it should hamper the Bank of Korea's rate cut."
Lee Young-won, chief strategist at HMC Investment Bank, said Japan is seeing its exports increase since bringing in Abenomics, while its Asian competitors like Korea and China are sluggish in the export market.
He pointed out that the Korean won has appreciated against not just the dollar or yen, but also other currencies, including the euro which has been losing value after the quantitative easing.
"The exporting conditions have deteriorated for Korean firms not only in Europe but also in Latin American markets. Unless the dollar turns strong, things will look negative for exporters. Exports won't see a meaningful recovery for the first half of this year," he said.
