Pots And Kettles

19 Feb

The BoK's Kim Choong-sooBank of Korea chairperson, Kim Choong Soo, worries about Japan’s suddenly strong yen.

The yen fell against the dollar and the won after the G-20 refrained from censuring Japanese policies that have driven the currency’s decline. Bank of Korea Governor Kim Choong Soo said in an interview with the Wall Street Journal in Moscow that the monetary authority will closely monitor the impact of Japan’s policy stimulus on the South Korean economy.

“There were expectations the G-20 would comment on the Japanese currency and that didn’t happen,” said Jeon Seung Ji, an analyst at Samsung Futures Inc. in Seoul. “That’s prompting the drop in the won, which had gained a lot” before the meeting, she said.

The won fell 0.4 percent to close at 1,082.10 per dollar in Seoul, according to data compiled by Bloomberg. It gained 1.6 percent last week, the biggest five-day advance since the period ended Dec. 2, 2011.

One-month implied volatility for the won, a measure of expected moves in the exchange rate used to price options, gained 20 basis points, or 0.20 percentage point, to 7.23 percent, data compiled by Bloomberg show.

Two days of talks between G-20 finance ministers and central bankers ended in Moscow Feb. 16 with a statement that pledged not to “target our exchange rates for competitive purposes,” without singling out Japan. Bank of Korea’s Kim said in the WSJ interview that he hopes the yen isn’t being deliberately weakened.

Leaving aside that last bit of conspiracy-tinged whining, Japan’s weak-yen policy is a tribute to the BoK’s currency policies that propelled the South Korean economy out of the late-90s doldrums. Laying off workers and deflating the won was how the South Koreans did it then.

The Korean government did not wait for market confidence to stabilize the financial markets. Instead, it aggressively controlled the financial institutions to keep the country’s credit system intact while pursuing gradual structural reform. In this regard, the Korean government did not thoroughly follow the policy implications of the weak-fundamentals view that focus on prompt structural reform and recapitalization of the financial sector. Companies were able to survive the crisis partly because real wages did not increase as much as labor productivity. The labor market dynamics and fast recovery, however, do not necessarily support the recovery feature of the financial-panic view. Korean labor markets were not flexible and efficient before the crisis, and labor adjustment overshot after the financial crisis.

Korea’s recovery was only possible after it gained control of its currency crisis. Interestingly, the recovery process affirms neither the weak-fundamentals view nor the financial panic view. Although some weak fundamentals were addressed after the crisis, the recovery was in motion before the fundamental problems were secured, and Korea continues to struggle with structural weaknesses that were present before the crisis. The financial-panic view also does not adequately explain what took place in Korea. Calming nervous investors so that conditions would stabilize and return to pre-crisis levels isn’t what happened. Conditions stabilized, but they did not return to pre-crisis levels. A combination of factors in crisis management contained the downward spiral. Korea can attribute much of its recovery to the creation of alternative funding sources and labor adjustments.

Actually, Japan slashing its currency is less than what Seoul did, as far as Kim is bemoaning. It goes to show, Koreans just don’t like a fair fight.


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