Friday, February 25, 2011

Blame Foreign Speculators? They HELP Korea, Not Hurt It

Koreans Love to Blame Foreign Speculators
You can easily find that Koreans based in Korea often blame foreign speculators for the volatility of Korean markets and assets in general. In the Korean press, you will be able to find not-so-subtle articles which suggest that foreigners are responsible wild gyrations in asset prices.  Sometimes, the blame rises to a fever pitch, and political decisions get made which are totally unjustified when you apply internationally accepted norms.  Not norms only accepted by the U.S., but by the global community as well.  As Korea matures into a first-world country, these political decisions are not favorably received by the global community.  The Seoul Gyopo Guide has pointed out, on multiple occasions, that the KEB debacle was completely unjustified, and motivated by political whim only.  The reality is that over the past few years, Korea has benefited greatly from foreign speculators' movement of money around the world.

Korea Has Benefited a Great Deal Because the Yen is Strong
For those that have read the Seoul Gyopo Guide in the past, this headline is no surprise.  Korea has feasted on one simple fact:  the Japanese Yen is very strong, for a number of reasons, and that has made Japanese products too expensive in the international marketplace, and in many cases, has severely hurt Japanese company profitability.  Toyota, Sony, you name it, they have been hurt by Japanese Yen strength.  Who has benefited?  Hyundai-Kia and Samsung Electronics (and others).  We can debate this or that feature but the fact is that these products by Japanese and Korean companies are very competitive with each other.  The reason that has occurred is because Korean companies have used their gains in the international marketplace to improve the quality of products produced.  Those gains were the result of the fact that Korea's products were cheaper compared to Japanese products due to the JPY/KRW exchange rate.  Twenty years ago, no one would compare a Sonata with an Accord.  Today, that is very much the case.  Korea has the strong Yen, in no small part, to thank for that.

Why is the Yen So Strong If Its Economy is in Decline?
There are a large number of reasons for this and too numerous to completely analyze here.  However, here are a few.  First, Japan has an economy where its debt, though very large, is largely owned by the Japanese.  As a result, you don't have foreign investors selling Yen-denominated securities every time it is more clear that the Japanese debt burden is large.  The ratings agencies have downgraded Japan recently.  The Japanese Yen didn't move appreciably.  Second, the stability of the debt, coupled with the stagnant Japanese economy, has led to the "Yen carry trade."  It has allowed foreigners to convert into Yen, and then pay back the Japanese interest rate, which has remained close to zero because of the stagnant Japanese economy. So, when there is increased risk around the world, investors convert their currency into Yen.  That is exactly what has occurred over the past week, and over much of the past few years, as governments around the world have borrowed money from foreign investors.  Where has that not occurred?  Japan.  The result, the Yen, which should otherwise be weak, has remained strong relative to other global currencies, and the Korean Won.

The Korean Won / Japanese Yen FX Rate Hasn't Moved
In fact, the rate as of this writing is approximately 13.6.  Before the financial crisis hit, that rate was around 8.0.  Amazingly, the Korean Won has actually weakened compared to the Japanese Yen since the beginning of 2010.  That has been to Korea's corporate benefit.  The reason that there are so many more Japanese and Chinese tourists around Myung-Dong?  Korea is cheap compared to their own markets.
Now, part of this is explained by the Bank of Korea's intentional policy.  The BOK has a difficult task, because a weak Korean Won has caused increased inflation.  For example a Korean Won can buy fewer imports because the import is priced in its own currency.  It isn't all good news that the Korean Won has not strengthened greatly against foreign currencies. Nevertheless, the idea that foreign speculators are to blame is a misguided notion.

The Lost Seoul is qualified to write in-depth posts around this topic but is more interested in the central theme: Korea will have to deal with the effects of joining the elite nations of the world.  Critics of the government and policy makers will need to take this into account before throwing out inaccurate statements and criticisms  which no longer apply.  The rules of competing on a global playing field, with and against competent, global competitors are not easy to manage, nor should they be.  Old-fashioned thoughts and criticisms applied when Korean companies did not make world-class products.  Old-fashioned criticism against the government don't work because while Korean products are world-class, the restraints of small population, small geographic size, and lack of natural resources are unique to Korea when compared to Germany, Japan, and the U.S.  As a result, policy must take this into account, and critics must as well.
These are "high-quality" problems.  A "high-quality" problem is one that occurs because Korea has successfully used the past few decades to make unprecedented progress on the global economic stage.  Other "emerging market" countries have not had to deal with the same restraints that Korea has faced and overcome.  Brazil?  Enormous amounts of natural resources.  China?  1.4 Billion people.  India?  1.1 Billion people.  Foreign speculators are not the root of the problem:  the issue is that Korea faces unique challenges as it stares down Toyota, Siemens, and Ford on the global stage.  Blaming foreign investors as wild speculators have actually created Yen appreciation, which has, and continues, to benefit Korea.


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