The Bank of Korea Has Taken Criticism for its Recent Decision
The other day, the Bank of Korea (BOK) kept its target interest stable, which was different from market expectations. Market participants widely believed that another rate increase would occur. In the Wall Street Journal's Korea Blog, it was reported that the Bank of Korea has received a great deal of criticism about this most recent decision. The Seoul Gyopo Guide believes that over time, interest rates must increase in Korea. However, the criticism for the most recent, one-time decision, is unfounded because the situation is far more difficult than has been reported. The Seoul Gyopo Guide has described the Bank of Korea's difficult position here, three weeks ago. This difficult balancing act is one that the Bank of Korea will need to perform for the immediate future.
Demand Pull Inflation? Not So Fast.
Some economists would suggest that Korea has faced something called "demand-pull inflation," which is that everyday Koreans are trying to buy more items, such as food, clothing, entertainment, and durable goods like appliances. Really? Anecdotal evidence doesn't suggest that. While department store sales have increased, the fact is that there isn't a shortage of items for sale in the stores. In fact, popular imported items have increased in price due to the relative weakness of the Korean Won compared to its counterparts, such as the Euro. That said, it is undoubtedly true that credit card companies have loosened their standards of lending considerably, which has added liquidity to the domestic Korean economy.
Much of the reason that everyday Koreans may be more confident is because they know that Korean companies are prospering in the international marketplace. It is the case that the weak Won relative to other currencies, especially the Japanese Yen, has contributed greatly to this. The Seoul Gyopo Guide has written about this a number of times. A reversal of this will make Korean products less competitive from a price perspective, which would, in turn, cause lower Korean corporate profits. Korean consumer confidence would fall, and the current optimism would fade. A sharply higher interest rate would make the Won rise.
The Real Estate Problem
The elephant in the room is the fact that the Korean real estate market is in trouble. In Gangnam, the district of Seoul of the most expensive apartments in Seoul, the price of only the most expensive apartments is stable. Apartments in the USD 1,000,000-3,000,000 range have dropped during the past two years. Lower real estate prices are especially damaging to Koreans, because Koreans have a larger percentage of their entire net worth invested in their homes. The number one factor in real estate prices? Interest rates. A rate increase by the BOK would only serve to worsen the situation. In the United States, the US Federal Reserve has fought very, very hard, to keep interest rates lower to slow the rate of price declines of real estate. It can be argued that this will not end well, but it shows just how important that the US Fed believes that the value of real estate is the US economy. In Korea, where the percentage of overall wealth spent on real estate ownership is higher than in the US, can the economic logic be much different? No.
The BOK Needs To Maintain Its Right to Be Unpredictable
If you knew for sure that the price (of anything) would be higher tomorrow, then the price would be higher today. You don't need an economics degree in order to understand this. Interest rates can be defined as the price of money. So, if the Bank of Korea was entirely predictable in the direction and timing of its interest rate moves, than that, in itself, would be self-defeating. The BOK needs to have the element of surprise in its decisions. The reasons? First, it must maintain its ability to intentionally shock the markets. Gradual interest rate changes do not accomplish this. The reason for the need to shock the markets is that the BOK needs to be able to communicate to the domestic and international marketplace that there is an urgent need for interest rate changes. Second, the BOK needs to be able to move in large increments should conditions warrant. Why? The world remains unstable in the fallout of the financial crisis. The huge amount of governmental stimulus has created imbalances around the world. That has made different locations (Greece, Ireland, Middle East) subject to wild changes in fortune. Due its small size, small population, and very dense concentration in profits among a very few industries, the BOK must maintain all its options to the fullest extent possible. The element of surprise is one of those options.
Opinions
One of the reasons for creating the Seoul Gyopo Guide was to educate those unfamiliar with the Korean economy about Korea. Along with that, native Koreans themselves must understand how Korea fits within the global market, where capital moves rapidly. In some ways, Korea is very prepared for that. Its end products are world-class in many industries. However, in other ways, Korea has not found the proper balance between openness to capital flows and its pursuit of economic independence. Complete economic independence is not possible unless Korea annexes larger, more heavily populated countries, which are rich in natural resources, in a peaceful manner. In other words, it is virtually impossible. The Bank of Korea is reacting properly to this by maintaining its maximum flexibility. Criticisms of being a "tool of the administration" may be, in part, true. However, given Korea's small size and inherent vulnerability, the BOK can accept that misguided criticism in favor of its pursuit of a combination of economic growth and price stability. Displacements in the Korean economy have a much larger effect than those that occur in larger countries like the US, or regions like the EU. As a result, applying the same type of logic that works in those areas don't necessarily work for Korea. Nevertheless, every decision that the Bank of Korea is, by its nature, controversial, and there will be Monday morning quarterbacks giving their opinion after each decision. Undoubtedly, the Bank of Korea is ready to accept that consequence.
Showing posts with label $EUR. Show all posts
Showing posts with label $EUR. Show all posts
Wednesday, February 16, 2011
Sunday, January 23, 2011
Korea's Tenuous FX/Interest Rate/Inflation Situation (Update 1)
Korea Declares A "War" on Inflation: Too Late, It's Here
This past week, President Lee Myung-bak declared a "war on inflation." Official statistics reflect what every day Koreans have already know: inflation is a problem at home. The Seoul Gyopo Guide has pointed out here, months ago, that the KOR-US Free Trade Agreement needed passing immediately in order to reduce the cost of any imports that come from any country. Later this year, a Korea-EU Free Trade Agreement should also be in place. These agreements are important, but they are not the dominant factors affecting everyday Korean life. This post describes some of the issues that face the Korean economy, and potential effects on the Korean population.
Korean Inflation Has Been Rising and Looks Like It Will Continue
After the fact, it has been reported that Korea's inflation rate has risen to 2 1/2-year highs. To working-class Koreans, this is not news. As a country that is highly dependent upon foreign sources of energy, the rise in the price of oil to nearly USD 90/barrel is an unwelcome development. In addition, the price of commodities such as metals and food have also risen dramatically. Given that Korea is a net importer of each of these, inflationary pressure is set to rise for the foreseeable future, as companies will attempt to increase prices of final goods.
Korean Interest Rates Are Going Up
This past week, the Bank of Korea increased interest rates, to the surprise of many. The reason that interest rates are used to curb inflation is because higher interest rates will create additional demand for the Korean Won relative to other currencies. In addition, people may choose to save instead of spend which will gradually reduce demand.
Rises in Interest Rates Could Hurt Korean Competitiveness
The other side of this balance is that stronger demand for the Korean Won relative to other currencies will make Korean-made exports less profitable for Korean corporations, or reduce demand for Korean-made products. Since the beginning of the financial crisis beginning in 2007, Korea has benefited a great deal from the relative cheapness of the Korean Won. This point has been made by the Seoul Gyopo Guide a number of times. In fact, one reason that Japan's economy continues to lag is because competitive Korean-made products are cheaper than their Japanese competitors' products. Conversely, if the Korean Won strengthens compared to other foreign currencies, particularly versus the USD, EUR and JPY, Korean products may suffer on the international marketplace. This would be a major source of concern for all Koreans.
(Update 1)In the English version of Dong-A Ilbo, this article was written to reflect the same opinions already posted here on the Seoul Gyopo Guide. The downgrade of Japan's debt rating by Moody's may have contributed to a slight depreciation in the Japanese Yen against the U.S. dollar last week. Whether or not this is coupled with Korean Won strength or weakness is yet to be seen.
Rises in Interest Rates Will Hurt Domestic Real Estate
In addition to the challenge that a rising Korean Won would create on the international marketplace, the domestic Korean real estate market will continue to struggle. The single biggest factor in the value of real estate is the level of interest rates. Higher interest rates make it more expensive to borrow to buy an apartment, even in Gangnam-gu. If the Bank of Korea continues to raise interest rates, then the value of domestic real estate cannot rise dramatically. There are other factors influencing the price of Korean real estate. For example, the aging population will reduce demand, over time, for apartments in the busiest parts of Seoul. That will translate to lower prices over time.
In addition, greater transparency and greater belief in the laws governing Korean corporations will reduce the percentage of household wealth used for real estate. Why is that? It is because there are other assets, such as stocks and bonds, which may be more promising. Those investments have been hampered by the fact that Koreans themselves are very wary of the largest chaebol, the government, and the legal structure that keeps corporate misuse of funds in check. As the Korean economy and regulations mature, native Koreans may re-allocate their wealth from real estate to other areas.
The problem with lower real estate prices is that people will feel less secure, and may be unwilling to spend. This has happened in the United States, where the plunge in real estate prices has depressed consumer spending. It is not a heroic prediction to suggest that if Korean real estate prices decline, then Koreans that own their apartments are going to spend less money for food, movies, entertainment, and mobile phones. (Well, maybe not for mobile phones, but you get the idea.)
The other problem with lower real estate prices is that there are lower amounts of real estate taxes that will be collected by the government. Why is this bad? It is bad because then the government would have less money to spend, if further economic stimulus is needed. Korea has spent a great deal of money during the financial crisis by bringing forward infrastructure projects, as well as compensating construction companies who built large apartment complexes outside of central Seoul, and that remain unoccupied, even today.
A Few Potential Solutions
The Seoul Gyopo Guide has pointed out that the government and companies and society face difficult choices. That is what is called a conundrum. There are no easy solutions. However, here are a few, some of which have been proposed in earlier posts.
First, Korean companies need to hedge their exposure to the possible appreciation of the Korean Won. This point has been made by the Seoul Gyopo Guide months ago. If the Korean Won rises, and Korean products are less competitive, then the only way that Korean companies' profitability will be sustained is if there are measures to counteract a stronger Korean Won. That is fundamentally different from recommending that Korean corporations should speculate on the KRW/JPY rate. If there is a decline in global demand, or an appreciation of the KRW relative to other currencies, then Korean corporate performance will suffer, almost regardless of the quality of Korean-made products. In short, the relative strength of the KRW is to Korean corporations can be compared to jet fuel prices to airlines. The best-run airlines partially hedge their exposure, and so should Korean corporations. Korean corporations need to do this without taking excessive risks; the knock-in, knock-out (KIKO) options debacle was a situation where Korean corporations misused derivatives (with the help of securities dealers) can be avoided by using simpler, more straight-forward strategies.
Second, Korean companies' investments in technology to create the most sophisticated, leading-edge products must be accelerated. Korean companies have made huge market gains, even since the beginning of the financial crisis. The hard-won profits and market share must be deployed to make sure that Korean-made products are the best from both a quality and features standpoint. The Seoul Gyopo Guide has pointed out that China has overtaken Korea in shipbuilding during 2010. Korea must reclaim its lead by offering superior products, and Hyundai Heavy, Samsung Heavy, et al seem to have responded. Samsung Electronics, Hyundai-Kia Motors, and other leaders must do the same.
Third, the Korean economy must support small and medium-sized enterprises. There needs to be a better way for the highly-educated Korean population to create wealth other than via speculation or working for a large chaebol. This includes, but is not limited to, tax incentives for new businesses. Small businesses employ the largest number of Americans, and while that is an unrealistic goal for Korea, there is little doubt about the fact that Korea has a well-educated, creative population which can create new ideas/products, and thus, companies.
Admittedly, this is only a partial list of suggestions. There will need to be changes in every aspect of Korean life, and perhaps even the way of thinking, in order for these suggestions to be taken seriously. However, the benefit would be that Korea would become more independent in determining its own economic course. That has limits, certainly, because of Korea's lack of natural resources, small population, and small geographic size. Nevertheless, moving forward in this way will reduce the burden on the government which has to tread carefully. Currently, if there were policy errors of any sort, then the consequences would be devastating. The time to address these issues is now, while Korea's economy is in relatively good shape compared to its global counterparts, not when there is an emergency situation.
Please "Like" this post and/or follow TheLostSeoul on Twitter
This past week, President Lee Myung-bak declared a "war on inflation." Official statistics reflect what every day Koreans have already know: inflation is a problem at home. The Seoul Gyopo Guide has pointed out here, months ago, that the KOR-US Free Trade Agreement needed passing immediately in order to reduce the cost of any imports that come from any country. Later this year, a Korea-EU Free Trade Agreement should also be in place. These agreements are important, but they are not the dominant factors affecting everyday Korean life. This post describes some of the issues that face the Korean economy, and potential effects on the Korean population.
Korean Inflation Has Been Rising and Looks Like It Will Continue
After the fact, it has been reported that Korea's inflation rate has risen to 2 1/2-year highs. To working-class Koreans, this is not news. As a country that is highly dependent upon foreign sources of energy, the rise in the price of oil to nearly USD 90/barrel is an unwelcome development. In addition, the price of commodities such as metals and food have also risen dramatically. Given that Korea is a net importer of each of these, inflationary pressure is set to rise for the foreseeable future, as companies will attempt to increase prices of final goods.
Korean Interest Rates Are Going Up
This past week, the Bank of Korea increased interest rates, to the surprise of many. The reason that interest rates are used to curb inflation is because higher interest rates will create additional demand for the Korean Won relative to other currencies. In addition, people may choose to save instead of spend which will gradually reduce demand.
Rises in Interest Rates Could Hurt Korean Competitiveness
The other side of this balance is that stronger demand for the Korean Won relative to other currencies will make Korean-made exports less profitable for Korean corporations, or reduce demand for Korean-made products. Since the beginning of the financial crisis beginning in 2007, Korea has benefited a great deal from the relative cheapness of the Korean Won. This point has been made by the Seoul Gyopo Guide a number of times. In fact, one reason that Japan's economy continues to lag is because competitive Korean-made products are cheaper than their Japanese competitors' products. Conversely, if the Korean Won strengthens compared to other foreign currencies, particularly versus the USD, EUR and JPY, Korean products may suffer on the international marketplace. This would be a major source of concern for all Koreans.
(Update 1)In the English version of Dong-A Ilbo, this article was written to reflect the same opinions already posted here on the Seoul Gyopo Guide. The downgrade of Japan's debt rating by Moody's may have contributed to a slight depreciation in the Japanese Yen against the U.S. dollar last week. Whether or not this is coupled with Korean Won strength or weakness is yet to be seen.
Rises in Interest Rates Will Hurt Domestic Real Estate
In addition to the challenge that a rising Korean Won would create on the international marketplace, the domestic Korean real estate market will continue to struggle. The single biggest factor in the value of real estate is the level of interest rates. Higher interest rates make it more expensive to borrow to buy an apartment, even in Gangnam-gu. If the Bank of Korea continues to raise interest rates, then the value of domestic real estate cannot rise dramatically. There are other factors influencing the price of Korean real estate. For example, the aging population will reduce demand, over time, for apartments in the busiest parts of Seoul. That will translate to lower prices over time.
In addition, greater transparency and greater belief in the laws governing Korean corporations will reduce the percentage of household wealth used for real estate. Why is that? It is because there are other assets, such as stocks and bonds, which may be more promising. Those investments have been hampered by the fact that Koreans themselves are very wary of the largest chaebol, the government, and the legal structure that keeps corporate misuse of funds in check. As the Korean economy and regulations mature, native Koreans may re-allocate their wealth from real estate to other areas.
The problem with lower real estate prices is that people will feel less secure, and may be unwilling to spend. This has happened in the United States, where the plunge in real estate prices has depressed consumer spending. It is not a heroic prediction to suggest that if Korean real estate prices decline, then Koreans that own their apartments are going to spend less money for food, movies, entertainment, and mobile phones. (Well, maybe not for mobile phones, but you get the idea.)
The other problem with lower real estate prices is that there are lower amounts of real estate taxes that will be collected by the government. Why is this bad? It is bad because then the government would have less money to spend, if further economic stimulus is needed. Korea has spent a great deal of money during the financial crisis by bringing forward infrastructure projects, as well as compensating construction companies who built large apartment complexes outside of central Seoul, and that remain unoccupied, even today.
A Few Potential Solutions
The Seoul Gyopo Guide has pointed out that the government and companies and society face difficult choices. That is what is called a conundrum. There are no easy solutions. However, here are a few, some of which have been proposed in earlier posts.
First, Korean companies need to hedge their exposure to the possible appreciation of the Korean Won. This point has been made by the Seoul Gyopo Guide months ago. If the Korean Won rises, and Korean products are less competitive, then the only way that Korean companies' profitability will be sustained is if there are measures to counteract a stronger Korean Won. That is fundamentally different from recommending that Korean corporations should speculate on the KRW/JPY rate. If there is a decline in global demand, or an appreciation of the KRW relative to other currencies, then Korean corporate performance will suffer, almost regardless of the quality of Korean-made products. In short, the relative strength of the KRW is to Korean corporations can be compared to jet fuel prices to airlines. The best-run airlines partially hedge their exposure, and so should Korean corporations. Korean corporations need to do this without taking excessive risks; the knock-in, knock-out (KIKO) options debacle was a situation where Korean corporations misused derivatives (with the help of securities dealers) can be avoided by using simpler, more straight-forward strategies.
Second, Korean companies' investments in technology to create the most sophisticated, leading-edge products must be accelerated. Korean companies have made huge market gains, even since the beginning of the financial crisis. The hard-won profits and market share must be deployed to make sure that Korean-made products are the best from both a quality and features standpoint. The Seoul Gyopo Guide has pointed out that China has overtaken Korea in shipbuilding during 2010. Korea must reclaim its lead by offering superior products, and Hyundai Heavy, Samsung Heavy, et al seem to have responded. Samsung Electronics, Hyundai-Kia Motors, and other leaders must do the same.
Third, the Korean economy must support small and medium-sized enterprises. There needs to be a better way for the highly-educated Korean population to create wealth other than via speculation or working for a large chaebol. This includes, but is not limited to, tax incentives for new businesses. Small businesses employ the largest number of Americans, and while that is an unrealistic goal for Korea, there is little doubt about the fact that Korea has a well-educated, creative population which can create new ideas/products, and thus, companies.
Admittedly, this is only a partial list of suggestions. There will need to be changes in every aspect of Korean life, and perhaps even the way of thinking, in order for these suggestions to be taken seriously. However, the benefit would be that Korea would become more independent in determining its own economic course. That has limits, certainly, because of Korea's lack of natural resources, small population, and small geographic size. Nevertheless, moving forward in this way will reduce the burden on the government which has to tread carefully. Currently, if there were policy errors of any sort, then the consequences would be devastating. The time to address these issues is now, while Korea's economy is in relatively good shape compared to its global counterparts, not when there is an emergency situation.
Please "Like" this post and/or follow TheLostSeoul on Twitter
Saturday, October 23, 2010
드디어 중앙일보에서 이 뉴스 나왔음. 오래전 우리 불록그에서 있었다.
Once again, The Seoul Gyopo Guide has reported news before one of the most important Korean newspapers and the International Herald Tribune.
http://joongangdaily.joins.com/article/view.asp?aid=2927280
This article entitled "Few ready for currency war" addressed the risks that a currency war would present to Korean companies. It is true: Korean companies, more than other countries, are vulnerable to volatility in foreign exhange levels.
There are many issues here.
First, foreign exchange movements can be partially hedged. What does this mean? That means that Korean companies can (and should) use financial instruments such as derivatives so that the companies do not suffer deep losses during times of foreign exchange volatility. In the past, Korean companies hoped for volatility because the products were not yet the best when compared to foreign (largely Japanese) competition. THIS IS NO LONGER THE CASE. In the US, the only brand more expensive than a Samsung TV is Sony. And the price differential is not large. In countries outside of the US, that is largely the case. The Seoul Gyopo Guide was created, in part, to recommend these types of strategies. One of the first posts addressed this issue: http://seoulgyopoguide.blogspot.com/2010/09/koreas-reason-for-feasting-this-year.html The problem has been the misuse and/or misunderstanding of derivatives. In the respect, the article is accurate: Korean companies need to increase their knowledge of derivatives if they can help stabilize the companies' operations. My suggestion: hire a consultant when the cost cannot be managed inside the company.
Second, foreign investors will more likely NOT violently buy and sell equities in Korean companies that hedge. The reason is that if foreign investors are aware that Korean companies are capable of managing foreign exchange risk, that would be a very important reason to remain invested in Korea's great corporations. In the US, one example is Southwest Airlines. The airline industry is very exposed to fluctuations with respect to the price of oil. Southwest Airlines has been a pioneer in using hedging to reduce that exposure, and to focus investors' attention to Southwest Airlines' strategy and execution of its business. Korean often complain that foreign investors buy and sell and buy and sell which causes instability. Well, that exists in every other country as well. In the US, it has been reported that the average holding period of a particular share of stock is 11 SECONDS.
Third, JoongAngIlbo and the International Herald Tribune need to be faster in reporting these developments. It is not only Korean companies that are affected. Many private hospitals in Korea borrow money based on the JPY/KRW exchange rate in order to build their buildings. Plastic surgeons borrow money based on the JPY/KRW exchange rate to lease their expensive equipment. Wealthy individuals have been able to borrow money based on the JPY/KRW exchange rate when taking out a mortgage. Tourism to Korea has, and will continue, to vary greatly based on the strength or weakness of the Korean Won. Newspapers need to inform readers about these effects.
Korean companies can contact The Lost Seoul for derivative expertise, and Korean newspapers should be following the Seoul Gyopo Guide. The Lost Seoul is strictly qualified to provide advice and opinions on these complex matters. The initial consultation is free. One of The Lost Seoul's greatest frustrations is the fact that too often, Korean society is filled with people/companies that "say" that they are experts, when in fact, they are not. For that reason, the initial consultation on any of the business or educational services provided by The Lost Seoul are free of charge. I am that confident. (그 만금 자신이 있습니다. )
Good luck.
www.twitter.com/thelostseoul
thelostseoul@gmail.com
http://joongangdaily.joins.com/article/view.asp?aid=2927280
This article entitled "Few ready for currency war" addressed the risks that a currency war would present to Korean companies. It is true: Korean companies, more than other countries, are vulnerable to volatility in foreign exhange levels.
There are many issues here.
First, foreign exchange movements can be partially hedged. What does this mean? That means that Korean companies can (and should) use financial instruments such as derivatives so that the companies do not suffer deep losses during times of foreign exchange volatility. In the past, Korean companies hoped for volatility because the products were not yet the best when compared to foreign (largely Japanese) competition. THIS IS NO LONGER THE CASE. In the US, the only brand more expensive than a Samsung TV is Sony. And the price differential is not large. In countries outside of the US, that is largely the case. The Seoul Gyopo Guide was created, in part, to recommend these types of strategies. One of the first posts addressed this issue: http://seoulgyopoguide.blogspot.com/2010/09/koreas-reason-for-feasting-this-year.html The problem has been the misuse and/or misunderstanding of derivatives. In the respect, the article is accurate: Korean companies need to increase their knowledge of derivatives if they can help stabilize the companies' operations. My suggestion: hire a consultant when the cost cannot be managed inside the company.
Second, foreign investors will more likely NOT violently buy and sell equities in Korean companies that hedge. The reason is that if foreign investors are aware that Korean companies are capable of managing foreign exchange risk, that would be a very important reason to remain invested in Korea's great corporations. In the US, one example is Southwest Airlines. The airline industry is very exposed to fluctuations with respect to the price of oil. Southwest Airlines has been a pioneer in using hedging to reduce that exposure, and to focus investors' attention to Southwest Airlines' strategy and execution of its business. Korean often complain that foreign investors buy and sell and buy and sell which causes instability. Well, that exists in every other country as well. In the US, it has been reported that the average holding period of a particular share of stock is 11 SECONDS.
Third, JoongAngIlbo and the International Herald Tribune need to be faster in reporting these developments. It is not only Korean companies that are affected. Many private hospitals in Korea borrow money based on the JPY/KRW exchange rate in order to build their buildings. Plastic surgeons borrow money based on the JPY/KRW exchange rate to lease their expensive equipment. Wealthy individuals have been able to borrow money based on the JPY/KRW exchange rate when taking out a mortgage. Tourism to Korea has, and will continue, to vary greatly based on the strength or weakness of the Korean Won. Newspapers need to inform readers about these effects.
Korean companies can contact The Lost Seoul for derivative expertise, and Korean newspapers should be following the Seoul Gyopo Guide. The Lost Seoul is strictly qualified to provide advice and opinions on these complex matters. The initial consultation is free. One of The Lost Seoul's greatest frustrations is the fact that too often, Korean society is filled with people/companies that "say" that they are experts, when in fact, they are not. For that reason, the initial consultation on any of the business or educational services provided by The Lost Seoul are free of charge. I am that confident. (그 만금 자신이 있습니다. )
Good luck.
www.twitter.com/thelostseoul
thelostseoul@gmail.com
S. Korea Government Studying `Several' Measures to Control Capital Flows. 또? 아직도 하나 안배웠습니까?
Today, this article appeared on Bloomberg.com.
http://www.bloomberg.com/news/2010-10-21/s-korea-government-studying-several-measures-to-control-capital-flows.html
The reason for these measures would be to control the rise of the Korean Won against the US dollar. This article has pointed out that the Korean Won has increased by 6.6% over the recent past, which would make Korea the 3rd strongest amongst non-Japan Asian countries.
Even Bloomberg has it wrong. Compared to the USD, yes the KRW has appreciated. However, today the EUR/KRW has increased to 1575 from approximately 1480 two months ago. In addition, the JPY/KRW exchange rate has increased to 13.9 from a low of 13.35 in the middle of September. You can read my observation that the elevated JPY/KRW has created for Japan in my post here: http://seoulgyopoguide.blogspot.com/2010/09/koreas-reason-for-feasting-this-year.html
The problem here is that measures to control the foreign exchange rate of countries of Korea's GDP and capital flows almost always fails. Take the Japanese example. Recently, the Yen hasn't weakened at all despite repeated public comments, and foreign exchange intervention by the Bank of Japan. During the financial crisis of 2008, the BOK tried to actually defend its currency but instead, the Won depreciated by approximately 20% from the levels it tried to defend. Why is that? The global capital flows were larger than the amount of intervention. Quite simple, really.
This time, Korea is trying to weaken its currency, in order to keep its competitive advantage in the international marketplace for exports. World-class Korean products are relatively cheap compared to European and Japanese competition already. In addition, Korean citizens will experience a much greater risk of inflation in the near-term. Normally, interest rates need to increased in order to quell inflation. Doing so, when the rest of the world (except Australia) is keeping interest rates steady (and the U.S. is effectively lowering rates), will lead to increased demand for the Won.
Longer-term, the proposals considered by the BOK will weaken Korea's position in the global economy. Unilateral attempts to affect currency levels are not only almost always unsuccessful, but the countries that attempt to do so are perceived to be weak. The Swiss National Bank and BOJ are the two most recent exaples. No one believes in what these institutions are doing any longer. The result of the proposals considered by the BOK would inevitably be that when Korea wants to attract additional capital, it will not be able to spur demand for the KRW quickly enough.
In other words, unnatural measures will lead to unnatural circumstances The victims? Korean citizens.
http://www.bloomberg.com/news/2010-10-21/s-korea-government-studying-several-measures-to-control-capital-flows.html
The reason for these measures would be to control the rise of the Korean Won against the US dollar. This article has pointed out that the Korean Won has increased by 6.6% over the recent past, which would make Korea the 3rd strongest amongst non-Japan Asian countries.
Even Bloomberg has it wrong. Compared to the USD, yes the KRW has appreciated. However, today the EUR/KRW has increased to 1575 from approximately 1480 two months ago. In addition, the JPY/KRW exchange rate has increased to 13.9 from a low of 13.35 in the middle of September. You can read my observation that the elevated JPY/KRW has created for Japan in my post here: http://seoulgyopoguide.blogspot.com/2010/09/koreas-reason-for-feasting-this-year.html
The problem here is that measures to control the foreign exchange rate of countries of Korea's GDP and capital flows almost always fails. Take the Japanese example. Recently, the Yen hasn't weakened at all despite repeated public comments, and foreign exchange intervention by the Bank of Japan. During the financial crisis of 2008, the BOK tried to actually defend its currency but instead, the Won depreciated by approximately 20% from the levels it tried to defend. Why is that? The global capital flows were larger than the amount of intervention. Quite simple, really.
This time, Korea is trying to weaken its currency, in order to keep its competitive advantage in the international marketplace for exports. World-class Korean products are relatively cheap compared to European and Japanese competition already. In addition, Korean citizens will experience a much greater risk of inflation in the near-term. Normally, interest rates need to increased in order to quell inflation. Doing so, when the rest of the world (except Australia) is keeping interest rates steady (and the U.S. is effectively lowering rates), will lead to increased demand for the Won.
Longer-term, the proposals considered by the BOK will weaken Korea's position in the global economy. Unilateral attempts to affect currency levels are not only almost always unsuccessful, but the countries that attempt to do so are perceived to be weak. The Swiss National Bank and BOJ are the two most recent exaples. No one believes in what these institutions are doing any longer. The result of the proposals considered by the BOK would inevitably be that when Korea wants to attract additional capital, it will not be able to spur demand for the KRW quickly enough.
In other words, unnatural measures will lead to unnatural circumstances The victims? Korean citizens.
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