Economic officials consider it a "third rail," an issue so charged and dangerous that they dread its mere mention, especially if journalists are near. We're talking about the currency market.
Bureaucrats spend countless hours in the bowels of finance ministries and central banks worldwide mulling how to handle the dreaded exchange-rate question. It's a rare day, indeed, when a policy maker raises the issue on his own. Such was the case Monday during a chat with a senior South Korean official.
PHOTO: AP
"The weakening of the yen is still a big issue and it will hurt our economy, the entire Asian economy and even the US,'' Lee Jang-young, a senior counselor at South Korea's Ministry of Finance and Economy, said.
The sliding yen is big news in Asia's third-biggest economy.
News outlets are covering the Korean won's every zig and zag against Japan's currency. It's the hot topic among government officials and businesspeople. Even though its economy is recovering, South Korea hardly wants to see Japan suck up its share of Asia's export market.
With Japan and the US -- South Korea's biggest export market -- in recession, the nation can't afford losing what sales it's making abroad. It remains more vulnerable to global economic trends than many in Seoul may like to admit. Even the most optimistic of analysts admit nothing will return South Korea to health like an international recovery.
"Without a pickup in exports, I don't think this recovery will be sustainable," Lee said.
A global snapback would solidify South Korea's post-crisis revival. In the interim, analysts have been urging the government to seek a weaker won as a means of boosting the economy. That strategy has been complicated by Tokyo's own currency policies. In recent months, Japanese officials have driven down the yen with an enthusiasm rarely seen before.
And lower it they have; the US dollar has dropped from ?119 to the dollar on Oct. 1 to ?134 yesterday. What's most surprising to people in Seoul isn't how quickly the yen has slumped, but Tokyo's stubborn claim it isn't guiding the currency lower. Even during a recent swing through Asia, Japanese Prime Minister Junichiro Koizumi denied Japan was taking a beggar-thy-neighbor approach to the region.
"In order to figure out where the yen is going, you don't have to ask markets -- ask Mr. Koizumi," deadpanned Chung Mun-kun, executive managing director at Samsung Economic Research Institute.
As a South Korean policy maker, the Ministry of Finance's Lee isn't direct in voicing his suspicions about Tokyo's policies. In recent weeks, however, Seoul has become more vocal. "It's very dangerous for Japan to boost the economy through its currency policy," Finance Minister Jin Nyum said yesterday. "If the depreciation cycle continues, it will threaten the global economy."
Officials in Seoul understand why Tokyo wants to make its exports more competitive. Other efforts to end an 11-year slump haven't worked. The nation issued so much debt to fund public works projects that rating agencies are downgrading its credit. Interest rates, meanwhile, are close to zero percent. And so, focus has shifted to exporting the economy out of recession.
Until now, Tokyo stepped carefully. Officials in Tokyo know how politically explosive a falling yen can be in Asia. Not only could it pressure neighbors into a destabilizing round of competitive devaluations -- as we saw in 1997 -- but provoke emerging giant China into action as well. China has warned countless times that a weaker yen will force it to devalue its currency, which is pegged to the U.S. dollar. A chain reaction across Asia might follow.
US officials visiting Tokyo this week seem to be avoiding the yen at all costs. Yet in his struggle to sidestep the issue, US Treasury Secretary Paul O'Neill Monday disclosed much about his views on Japan's exchange-rate plans.
Here's what he said: "Exchange rate modifications can do nothing to fix a mountain of nonperforming loans or improve underlying rates of productivity. For Japan's important problems the subject is beside the point. A depreciating currency does not fix the problem loans, does not improve productivity rates."
Markets took O'Neill's comments to mean the US would tolerate a weaker yen. Yet O'Neill did nothing of the sort. All he said -- according to Japanese officials -- was that he "respects" the foreign exchange market's decisions. Not "we favor a weaker yen" or the "dollar is undervalued." O'Neill merely said markets should set currency rates.
More important, however, was what O'Neill said about the wisdom of Japan's strategy. He said Japan is wasting time thinking a more competitive exchange rate will work. That's hardly an endorsement of Tokyo's weak yen policy. O'Neill essentially called Japan small-minded and short on ideas. And he's right.
No one would like to see a robust Japanese recovery more than South Korea. It would be a major plus for this nation's 47 million people if Asia's biggest economy was strong and buying loads of South Korean cell phones, semiconductors and textiles. What Japan is doing instead is subtracting more from Asian growth than it's adding.
Not only would Asia be hurt by Japan hogging the region's export sector, but so might the US. In Washington, US manufacturers are stepping up a "devalue-the-dollar" campaign. With the US in recession and global growth slowing, waning competitiveness is the last thing US companies want. US stocks may take a hit as the dynamic spreads.
"The risk," Lee said, "is that the weak yen will hurt the very economies Japan hopes will buy its goods."
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