Weakening of yen against won fuels woes over Korea's export-led rebound

Sluggish yen could hurt Korea's economic recovery.

The Bank of Korea held its policy rate at 2.25% as expected, but the decision was non-unanimous and one board member voted to lower the rate.

According to a research note from HSBC Global Research, expectations of further easing have subsequently increased, but it is believed the central bank is in wait-and-see mode.

Meanwhile, the weaker yen has fuelled more concerns over Korea's export outlook. The weakening of the yen against the won has fuelled concerns over Korea's export-led recovery.

The report stressed that the direct impact on export growth is limited because the relative export price between Korea and Japan in contract currency terms has been fairly constant, especially when compared with the depreciation in the yen against the won.

Here's more from HSBC Global Research:

This means that global consumers have not fully benefited from the JPYKRW movements and explains why Korea's export growth has been be preserved so far.

But if the yen continues to stay weak against the won, the risk of Japanese manufacturers cutting contract currency prices to raise their volume growth rises.

If this risk materialises, it would hurt Korea's export growth and economic recovery, as noted by the Governor Lee today.

Even so, we note that Governor Lee stated in previous press conferences that the policy rate should not be used for FX purposes only.

As such, we believe officials may employ alternative measures, rather than lowering the policy rate, to support its exporters in a strong-won environment.