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These days Seoul's central district of Myeongdong is crowded mainly with Chinese tourists. In contrast, Japanese visitors, who flooded the shopping paradise two to three years ago, are now rarely seen.
It's undeniable that the chilly Seoul-Tokyo relationship has partly been the cause of this, but most importantly, it is the result of the steep slide of the Japanese currency. In fact, Japanese travelers to Seoul fell 14 percent during the first seven months of this year, while those from China surged 45 percent, according to statistics from the Seoul Metropolitan Government.
The pace of the yen's slide is alarming. The won-yen exchange rate, which is not determined in the currency market but changes according to fluctuations in won-dollar and yen-dollar rates, was quoted at 956 won per 100 yen on Monday, its lowest level in six years. The rate has been on a slide since breaking the 1,000-won barrier on Aug. 13, and it represents a fall of more than 100 won from the year's highest level of 1,073 won in early February.
The yen has remained weak against the Korean currency because Japan is poised to continue its quantitative easing to stimulate its long-dormant economy and the won has remained strong against the dollar relative to other currencies.
Given that the greenback looks set to remain strong for a long time amid signs of economic recovery in the U.S. and the Abe administration hints at continuing its loose monetary policy, the won-yen rate could dip below 900 won early next year.
It's no exaggeration to say that Koreans have had traumatic experiences from the yen's devaluation in the past. In the run-up to the 1997 currency crisis, the Korean won lost more than 30 percent against the yen, which caused Korea's current account imbalance to worsen significantly. The yen's fall between 2004 and 2007 also impacted on the Korean economy as it grappled with instability in 2008, when the global financial crisis hit the world.
What's most disturbing is that the government has little it can do because there is no currency market for the Japanese currency domestically. Of course, there are positive effects from the won's appreciation against the yen; for example, companies with lots of yen-denominated debt as well as those that import raw materials or intermediary goods from Japan can benefit.
But the yen's slide will undercut the price competitiveness of Korean goods by making them more expensive in overseas markets. Automakers, in particular, which are in intense competition with their Japanese rivals in the U.S., will be hit hard.
What's needed is for businesses to sharpen their competitiveness through improving productivity, but the government should do far more than reiterating such tenuous assertions when explaining the need to expand the home market.
