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엔화약세에 대한 평가 및 대응방향(Depreciation of the Japanese Yen) : Evaluation and policy recommendations

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Title 엔화약세에 대한 평가 및 대응방향(Depreciation of the Japanese Yen)
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Sub Title

Evaluation and policy recommendations

Material Type Reports
Author(Korean)

한국개발연구원(거시경제팀)

Publisher

[서울]:한국개발연구원

Date 2002
Series Title; No KDI 정책포럼
Pages 20
Subject Country South Korea(Asia and Pacific)
Language Korean
File Type Documents
Original Format pdf
Subject Economy < Macroeconomics
Holding 한국개발연구원; KDI 국제정책대학원

Abstract

This study seeks to examine the factors behind the Yen’s depreciation and its impacts on the Korean domestic economy, and building feasible response methods.

The Yen in recent times is turning out to become more unstable as its exchange rate is falling to 132 Yen/Dollar while the Korean exchange rate is increasing to 1,130 Won/Dollar at the same time. An unstable exchange rate led to the Yen losing its value, Korean companies losing their export competitiveness as a consequence, leading to the rise in concerns about foreign-exchange loss.

As Japan’s economic stagnation is getting prolonged, doubts over the structural reform of the Japanese economy is increasing, leading to a decrease in its recognition degree in the international financial market. The Japanese government seems to be accepting its currency’s weakening, while beliefs over the falling of the Yen’s value to last longer is spreading.

With the prolonged weakening of the Yen and the Won-Dollar exchange rate simultaneously rising, the Won’s effective value is increasing. Considering the balance on current account and the decreasing ripple effect on the real economy, the impact on the Korean economy is expected to be less severe, as well as the side-effects from exchange fluctuations including foreign-exchange loss and decreased money shift.

Due to the increase in the Won-Dollar exchange rate, the foreign-exchange loss in the private sector is also expected to be minor, which the Korean economy can handle. Such exchange fluctuations may work as an obstacle blocking the flow of international investments, but its side-effects are being resolved from the quick adjustment of the Won-Dollar exchange rate.

Taking the current circumstances into consideration, allowing the market’s free regulation of exchange rates to deal with external shocks such as the Yen’s depreciation will be a feasible approach, while the following can be pointed out as specific measures:

First, there is no need to seek for a specific exchange rate goal. Should the market seek for a specific level of Won-Yen exchange rate, the depreciated Yen can lead to an excessive increase in the Won-Dollar exchange rate, bringing more burden on price and monetary policies. As it is impossible to calculate for the balanced level of effective exchange rate by combining the Won exchange rates, the most probable method seems to be to accept the market’s self-regulating mechanism. The second method is to utilize the fluctuations of the effective exchange rate as information variables of monetary policies. Because the Yen’s weakening can lead to a price decrease in domestic politics, accepting a flexible adjustment on the Won-Dollar exchange rate from the weakened Yen while utilizing the effective exchange rate over Won-Dollar exchange rate as information variable for monetary policies seems to be more appropriate, keeping in mind that the partial increase in Won-Dollar rates does not come from an independent shock of price increase. The third method is to reinforce monitoring the Japanese economy in general. Should the Japanese government’s response fail to recover its faith in the market amid prolonged stagnation, there is a possibility for Japan’s interest rates and exchange rates to make a drastic change, causing shock on the international financial market, though its chances are low. To address this possibility, a continuous monitoring on the trend in the Yen’s value and structural risk factors on the Japanese economy should be maintained.

Finally, a continuous structural reform should be undertaken domestically. Should there be an external shock due to economic instability of neighboring countries, the most certain method to minimize its impact is to eliminate internal factors of vulnerability, implying the necessity for a continuous structural reform in addressing external shocks.