* Yen down 20 percent vs dollar over past year, won up by a
third against yen
* Weaker yen won't necessarily undercut South Korea's
* Currency fluctuations don't immediately translate into
By Wayne Arnold and Vikram Subhedar
May 23 South Korea's economic problems aren't
made in Japan.
That isn't the way it looks in the two rival exporters'
stock markets. Investors convinced that Japan's weakening yen
will help its companies claw global market-share back from
Korean competitors have bought almost $75 billion worth of
Japanese stocks so far this year. Part of that appears to have
come at the expense of South Korea, where foreign investors have
sold nearly $6 billion of shares.
Japan's benchmark stock index has thus soared 50
percent this year on hopes Prime Minister Shinzo Abe can revive
the economy and with it the fortunes of big exporters such as
Toyota Motor Corp and Panasonic Corp. Stocks
in Seoul have meanwhile stagnated, with Samsung Electronics Co
Ltd down around 1 percent.
The problem for Korea had seemed obvious: while the yen has
slid 20 percent against the dollar over the past year, the won
has climbed by a third against the Japanese currency. In theory,
that makes Korea's exports more expensive relative to Japan's,
enabling Japanese companies to undercut Korean competitors and
carry home more yen. In reality, that's unlikely to happen.
Japanese exporters have moved much of their output offshore.
And since fluctuations in the yen don't affect the cost of
producing overseas, continued weakness in the Japanese currency
- even long-term - won't necessarily undercut the
competitiveness of Korean manufacturers.
"The issue we hear from Korean exporters - that a weak yen
is bad for Korea - just is not proven," said Paul Donovan,
senior global economist at UBS in London. "It doesn't mean that
Korean companies lose market share, or that Korean companies
lose profit either."
For instance, in the first three months of 2013, Toyota sold
5 percent fewer vehicles while Korean rival Hyundai Motor Co
sold 9.2 percent more.
More worrisome are Europe's slump and slowing global growth,
which have weighed on both Japanese and South Korean exports.
South Korea, whose exports amount to more than half its
gross domestic product, has long served as a proxy for global
trade to investors. So stalled export growth in the first
quarter, led by reduced shipments to the United States and
Europe, was seen as an ill omen for stocks.
Japan's export numbers don't look much better. While
Japanese exports calculated in the weakened yen rose in the
first quarter by 1.2 percent, they dropped 11 percent in both
dollar terms and volume terms.
The weaker yen has also not immediately given Japan a bigger
share in overseas markets. In the United States where Toyota and
Hyundai compete most closely, the automakers lost market share
to American competitors in the first quarter, according to
industry market statistics firm Autodata.
Currency fluctuations don't translate into market share - at
least not right away - because multinationals can't change the
prices they charge as quickly as the currency moves.
According to UBS, Japanese manufacturers of transportation
equipment, a category that includes cars and trucks, have
managed to cut their prices by only about 1.1 percent in the
past year. Their Korean competitors have raised theirs by only
about 1.2 percent.
One reason is that currencies don't change the cost of
producing overseas. Big Japanese manufacturers have shifted much
of their production offshore to cut costs. Exports now amount to
the equivalent of just 12 percent of Japan's gross domestic
product, an amount exceeded by the combined revenues of just six
of its biggest brands: Hitachi Ltd, Panasonic, Sony
Corp, Honda Motor Co Ltd, Nissan Motor Co Ltd
and Toyota - whose exports from Japan account for less
than a quarter of the vehicles it sells worldwide.
Because so little of what they sell is exported, how much
the weaker yen helps Japan's economy depends largely on what its
companies do with the added yen they earn.
"The key to the second half and into 2014 is to see how that
gain in competitiveness translates into a broader boost for the
Japanese economy," said Simon Dobson, who manages the Japan
portfolio at London-based asset management firm BDT Invest.
"Following on from increased profits is increased investment,
rising employment and production and, finally, more
Korea's own manufacturing sector is hollowing out, too. More
than 80 percent of the mobile phones sold last year by South
Korean makers, including Samsung Electronics, were made outside
Korea, according to the National IT Industry Promotion Agency.
Hyundai Motor makes almost 60 percent of its cars overseas.
That result is that, while the dominance of exports and
manufacturing over the Korean economy is bigger than ever, the
number of jobs they create is shrinking. Last year, the number
of Koreans employed in manufacturing dropped below 16.6 percent.
With youth unemployment more than double the national rate,
pursuing a weaker won for the sake of exports has become
politically incorrect. Korea's new president, Park Geun-hye,
campaigned on promises to support domestic jobs over exports,
and to fight rising prices and household debt.
"The won-yen rate has not come at a good time for corporate
Korea at the moment, but it certainly is not the only problem
Korea faces," said Rob Brewis, who helps manage about $125
million in assets in Asia-related funds at BDT.
While there may be worries that a weaker yen is threatening
Korean exports, it may not pose much danger to either Korean
consumers or the kind of big companies whose stocks foreign
investors tend to own.
The market's decline has thus left Korean stocks looking
relatively cheap: Korean stocks trade at just eight times their
projected earnings, the lowest in Asia and roughly half the cost
of Japanese stocks, which now cost 15 times forecast earnings.