## Should Korea Worry about a Permanently Weak Yen?

_IMF Working Papers, July 16, 2015_

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## Bibliographic details
- Authors: Jack J Ree, Gee Hee Hong, Seoeun Choi
- Published: July 16, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513510835.001

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### Overview
- 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.

### Key findings
- 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.

### Implications for Japan
- 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.

### Implications for Korea
- 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.

### Mechanisms and evidence
- 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).

### Conclusions
- 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.*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/should-korea-worry-about-a-permanently-weak-yen-43089_