Korean, Taiwanese exporters worry over depreciating yen

Yen has dropped over 10% vs greenback.

According to DBS, the Japanese yen has dropped more than 10% against the US dollar since mid-November 2012 on market expectations of a weak yen policy to be pushed by Japan’s new government. 

Compared to the Korean won and the Taiwan dollar, the yen depreciated 12% and 10% respectively over the past two months.

We expect the weakness of the yen to continue in 2013. This is not only due to the possibility of a policy shift in Japan, but also due to Japan’s weak economic fundamentals – sluggish growth, deflation, a large fiscal deficit and a shrinking current account.

Meanwhile, Asian currencies including the KRW and the TWD are expected to be strongly supported, thanks to a cyclical recovery in Asia’s growth and a resumption of capital inflows into the region.

Here's more from DBS:

The cross-impact of yen depreciation and Asian currency appreciation is of interest. A cheaper yen could fuel the carry trades between the yen and the high-yield Asian currencies, boosting the value of the latter.

The appreciation of emerging Asian currencies, accompanied by the improvement in Asia’s economic fundamentals, could encourage the risk-on trade in global market.

This will in turn, reduce global demand for safe-haven assets including the yen.

As such, the weakness of the yen against the emerging Asian currencies including the KRW and the TWD is likely to be pronounced this year.

Negative for exporters: The depreciation of the yen against the KRW and the TWD raises concerns about the competitiveness of Korean and Taiwanese exporters.

The product structure of Korea/Taiwan’s exports is similar to that of Japan. The competition between Korea and Japan in the export market ranges from crude materials, chemicals, metals to electronics and automobiles.

Taiwan also competes with Japan in many of these sectors, except automobiles. A weaker yen would allow Japanese exporters to cut their export prices in the international market, squeezing the market share of their Korean/Taiwanese counterparts.

Positive for importers: Less considered, a weak yen also lowers the cost of imports from Japan. The yen-denominated import products will become cheaper in Korea and Taiwan, when translated into local currencies.

If the Japanese exporters cut the dollar-denominated product prices in the international market, the costs of importing from Japan will decline on a broad basis.

Both Korea and Taiwan have a significant reliance on imports from Japan, especially in the sectors of chemicals, metals, machinery, electronics, motor vehicles and optical products.

Imports from Japan accounted for 14% of Korea’s total imports and almost 20% of Taiwan’s total imports in the past five years.

Korea and Taiwan both have a large trade deficit with Japan, of about USD 30bn per annual. The Korean/Taiwanese manufacturers that import upstream components and raw materials from Japan will save production costs because of a weak yen.