The Bank of Japan’s (BOJ) surprise decision to ease monetary policy further might increase pressure on South Korea’s central bank to cut its benchmark interest rate again.
The yen’s tumble on Friday after BOJ Governor Haruhiko Kuroda boosted unprecedented stimulus is set to help make some Japanese products cheaper in export markets. That adds to competitive pressure for South Korea which could prompt action from Bank of Korea (BOK) Governor Lee Ju-yeol, economists said.
“If the yen continues to weaken, this will pose further downside risks to Korea’s exports,” Hong Kong-based HSBC Holdings PLC economist Ronald Man (文略韜) wrote in a note. “Lower export growth will weaken Korea’s economic outlook and, in turn, markets have naturally priced-in a higher probability of a rate cut.”
The yen at 7:02pm on Friday dropped 2.2 percent against the US dollar in Tokyo to trade near a six-year low. The Korean won fell 1.2 percent against its US counterpart, its biggest drop in 16 months, amid speculation authorities in Seoul are planning moves to weaken the currency.
Some of the biggest companies from the East Asian neighbors — from Toyota Motor Corp and Panasonic Corp in Japan to Hyundai Motor Co and Samsung Electronics Co in Korea — compete fiercely in global markets.
South Korea’s central bank on Oct. 15 cut its benchmark interest rate to a four-year low of 2 percent as it downgraded its estimates for growth and inflation.
Expectations of a cut below 2 percent are set to strengthen if downward pressure on the yen against the won persists and is perceived as a threat to South Korea’s growth potential, Man said.
The implications of the BOJ’s easing are important at a time when Korea’s export growth momentum appears weak, Nomura Holdings Inc economist Kwon Young-sun, wrote in a note.
The BOJ’s easing came two days after the US Federal Reserve ended its own quantitative easing.
South Korean authorities plan to closely monitor markets as volatility is increasing from a diverging monetary policy path between the US and Japan, South Korean Minister of Finance Choi Kyung-hwan said in Seoul after the Japanese decision.
Lee on Oct. 7 said in a parliamentary audit that the central bank was closely watching the impact of a weaker yen.
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