Thursday, January 16, 2014

Japanese yen devaluation is a danger to South Korea, no winners in devaluations

The competitive devaluation of the yen is a considerable threat to South Korea’s export machine because it competes with Japan in many export industries, including automobiles. Competition is also fierce in electronics, especially parts and components and machine tools.

Adding to the pressure of recent cost increases and the strong won is the lack of innovation in South Korean manufacturing. Samsung Electronics Co.’s smartphones accounted for 29 percent of world demand in 2012, but the mobile phone industry is reaching saturation, with new demand centered on low-priced models in developing countries.

Japan’s competitive devaluation comes at a critical time for South Korea. Despite huge monetary and fiscal stimulus, most economies around the world are experiencing slow growth. The obvious alternative to domestic-led economic growth is export expansion, but the question is, to whom? For decades, the U.S. has absorbed the world’s excess goods and services. Slower growth in real wages and incomes means Americans are no longer able to occupy that role. Indeed, U.S. trade and current account deficits are shrinking. These trends will probably persist as the rising consumer saving rate continues to damp demand.

So promoting exports requires making them cheaper to gain market share from other exporting countries. Yet when countries resort to tit-for-tat competitive devaluations, no one wins.