Should Korea Worry about a Permanently Weak Yen?

IMF Working Papers, July 16, 2015

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Three years have passed since the Bank of Japan’s asset purchase program was introduced in 2011, causing a sharp decline in the value of the Japanese Yen.
Research question: What would be the implications for Japan and Korea’s exporters if the weak Yen is here to stay?
Approach: Examine exporters’ pricing behaviors and volume responses to exchange rate shocks.

If the weak Yen persists, it would strengthen Japan’s price competitiveness over time as export prices respond with a lag.
Direct boosts to export demand will be rather limited.
A persistently weaker Yen would expand the Japanese exporters’ profits lastingly.
Expanded profits could reinvigorate the ability, particularly of flagship exporting firms, to compete and grow in the global market over time.
The muted price and volume response so far to the sustained weakness of the Yen may mask a more fundamental shift in the relative competitiveness of Japanese and Korean exporters.

Persistent Yen weakness → lagged decline in Japanese export prices → strengthened price competitiveness over time.
Persistent Yen weakness → lasting expansion of exporters’ profits → potential for enhanced investment and global competitiveness, especially among flagship exporters.
Limited direct demand gains from currency depreciation, but indirect competitiveness effects via profitability and firm dynamics may be significant.

The research raises concern that the current muted responses in price and volume could conceal a longer-term deterioration in the relative competitiveness of Korean exporters versus Japanese exporters if the Yen remains weak.

Focus on exporters’ pricing behaviors and volume responses to exchange rate shocks to identify:
- Price pass-through dynamics (lagged response of export prices to exchange rate movements).
- Volume responses (limited immediate demand boost from depreciation).
- Profit channel (exchange rate-driven profit expansion that can affect firm competitiveness and growth).

A permanently weak Yen is likely to have more profound medium-term effects than short-term indicators suggest:
- Strengthened Japanese price competitiveness via lagged price adjustments.
- Lasting profit gains for Japanese exporters that can translate into stronger global competitiveness over time.
- The apparent short-run muted response in export prices and volumes may understate a more fundamental competitive shift between Japanese and Korean exporters.

Source: "Should Korea Worry about a Permanently Weak Yen?" by Jack J Ree, Gee Hee Hong, and Seoeun Choi, IMF Working Paper, July 16, 2015.