Wednesday, December 15, 2010

The Gift That Keeps on Giving (to Korea): The Strong JPY

This Holiday Season, the Korean Economy's Cheer Comes From...Japan
The Seoul Gyopo Guide has posted several times regarding the Japanese Yen's strength, compared to the Korean Won, and the resulting excellent financial results being enjoyed by Korean corporations (chaebol).

Three months later, these observations have continued, and now results are are being made public, as Korea's unemployment rate has declined to a 6-month low.  Korea's unemployment rate now stands at 3.2%, compared the United States' 9.8%.  Admittedly, underemployment remains high in South Korea, which remains a longer-term, structural problem resulting from a small population, and the fact that manufacturing of many goods has moved abroad in order to take advantage of lower wages in foreign countries, and to avoid foreign countries' scrutiny of Korean trade practices.

In Japan, Economic Conditions Are Not Really Improving
The widely-followed Tankan survey of  large corporations dropped in the most recent poll.  The Japanese government is facing a large number of problems, including high debt levels and an aging population which is stunting personal consumption, despite continued government stimulus programs (The Seoul Gyopo Guide has advised Korean students to stop studying Japanese in favor of Mandarin or English due to the continued Japanese economic malaise).  After two decades, there doesn't seem to be any end in sight.  

The Bank of Korea's Juggling Act
The Bank of Korea (BOK) will face continued pressure to increase interest rates in order to quell domestic inflation.  The BOK has resisted rapid interest rate increases, and this behavior continued in December's monthly meeting.  How long this resistance will continue is unknown.  Korean household debt remains alarmingly high.  Credit-card companies in Korea have already experienced widespread failures within the past decade as a result of unpaid consumer debt.  In addition, the residential real estate market has struggled, even as other risky assets, such as equities and fixed income, have soared in value.  In short, the fact is the Bank of Korea faces a huge conflict on many fronts.

What Can Be Done? 
The Lost Seoul believes that a great deal of these difficulties result from the fact that Korean employees do not benefit from the improved financial results of Korean corporations.  Korean employees are not paid using shares of stock.  Bonuses are given in cash.  In most cases, this is preferred by employees, and for good reason.  However, the issue is that Korean employees are not participating in the financial asset price inflation that is occurring as a result of the strength of the KOSPI.  This would have allowed Korean employees to increase their wealth, increase their job ownership and loyalty, and improve Korean corporation efficiency.  This is not a short-term fix.  This is a structural change to Korean corporate practices which would help the needs of Korean employees and give the Bank of Korea the flexibility to determine the most appropriate policy.  Until structural changes are made, the Bank of Korea will need to continue to juggle conflicting goals with delicacy and deftness.  This holiday season, Japan's continued economic problems are providing Korea's economy with tidings, and providing the Bank of Korea with some needed flexibility.


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