Ho hum, another week, another declaration by a non-Western country that it will attempt to staunch the inflow of capital from elsewhere that is driving up the local currency and making imports less competitive. Japan of course started the latest salvo when the LDP regained power and promptly declared that they would use open-ended fiscal and monetary support to get the Japanese economy jump-started after over two decades now of stagnation. (Western nations have long been on this path, having implemented them after the global financial crisis.)
In response, other Asian exporters have been manoeuvring to deal with the ongoing deluge from Nippon. Spooked investors in South Korea have begun pulling out in fear of the authorities taking a more proactive stance in determining the value of the Korean won. I suppose the Korean authorities are pleased with the results of their verbal jawboning thus far of making foreign investors think twice and weakening the currency:
South Korea's threat to impose a broad tax on financial transactions is the first sign of deepening concern in Asia that speculation of competitive currency devaluations is prompting investors to head for the exit. Until then, and because investors had not shown any big signs of concern, Asia's reaction to the tensions centring on the yen had been passive, comprising an asymmetric mix of jawboning and light currency intervention.The old state-guided development is returning with a vengeance as the government is seeking the cooperation of conglomerates and state-owned firms alike in stemming Korean won strength:
The selloff in Seoul markets this week turned into a warning sign. Foreign investors posted their biggest daily stock selloff in 16 months in South Korea and pushing the won, a currency that best serves as a proxy for Asia, to a three-month low. The risk is that the threat of policy action will prompt more market selling, pushing currencies down yet further and raising investor fears of the competitive devaluations that policymakers are trying to avoid.
"Korea is going to be the first domino, and it's that domino effect that the yen's depreciation clearly risks," said Rob Ryan, currency and rates strategist at RBS, referring to the increasing likelihood that Korea announces some form of currency control measure soon. "The real trigger has been the equity market reaction and the outflows from Korea. I think the concerns over intervention are a little overdone just yet, but clearly it is a big risk if the yen continues to weaken..."
South Korea has understandably been the most vocal of Asian policymakers on the subject of the yen. Heavyweight Korean exporters such as Samsung Electronics Co and Hyundai Motor Co, which compete directly with Japanese electronics and auto companies, have seen their competitiveness eroded as the won increased in value from as low as 15 per yen to near 11.8 over the past six months. Foreigners have sold a net 1.8 trillion won ($1.65 billion) Korean stocks this month. The stock market is down 3 percent so far this year. Foreigners have been buying Taiwanese stocks, but those volumes are far lower than they were in 2012...There are follow-on effects that may be even direr. China, for one, is South Korea's single largest export market and may not take so kindly if the won is regulated further:
The Korean government will tell state-controlled firms to refrain from borrowing abroad and will further tighten rules on banks' currency derivatives trading to ease volatility in foreign exchange markets, Choi said. Seoul was opposed to imposing an outright levy on financial transactions, such as the Tobin tax being debated in Europe. But it would consider similar measures should speculation in the won intensify over time, he said.
Still, many believe policy risks are rising. Nearly half of Japan's trade is with the Asia-Pacific region and China may not stand pat if Korea imposes currency controls given it is Korea's largest export market. In addition, capital controls have gained some acceptability as a policy response in emerging markets to deal with easy money in the developed world. Even the International Monetary Fund, traditionally a champion of liberalised markets, has conceded that capital controls are sometimes necessary.I guess the trick is to spook hot money but not real investors who are in it for the longer haul. Where does that divide lie? Hard to tell, but Korea risks negating market sentiment if it goes overboard with these efforts to throw sand into the wheels of international finance and trade. It's not surprising that international currency war has finally hit East Asia--but remember who started it in the first place despite repeated denials.