(Refiles to change "the" to "that" in paragraph 2, removes
extraneous word in paragraph 3)
* S.Korea Jan exports +11.8 pct y/y, growth at 11-mth high
* S.Korea HSBC/Markit Jan PMI s/adj 49.9 vs 50.1 in Dec
* S.Korea Jan CPI +1.5 pct y/y, far below BOK target range
* Government says won strength may have started hurting
By Se Young Lee
SEOUL, Feb 1 South Korean exports in January
rose more than expected, but not enough to offset weak domestic
demand, global uncertainties and the fallout from monetary
easing by the advanced countries that all pose stern challenges
for its economy.
Some of the monthly indicators released on Friday supported
a view that Asia's fourth-largest economy has turned the corner,
while analysts said prospects for a recovery that would be
modest at best would prompt the Bank of Korea to cut interest
The government said exports rose 11.8 percent in January
from a year earlier and imports grew 3.9 percent, both topping
market expectations. A private sector survey indicated new
export orders in January also grew from December.
"Though exports are recovering as external conditions
improve, corporate investment remains suppressed because of
uncertainties about the won-yen exchange rate and home prices
continue to deflate, so domestic demand still isn't recovering,"
said Lee Chul-hee, chief economist at Tong Yang Securities.
Other indicators highlighted continuing weak domestic
demand, with inflation staying far below the lower end of the
central bank's target range, housing prices falling for a
seventh consecutive month, and manufacturing activity shrinking.
ANALYSTS SEE INTEREST RATE CUT, WON MEASURES
January exports showed their sharpest annual gain in 11
months, but this outcome was exaggerated by more working days
than a year earlier, while the major export destinations of
Europe and the U.S. are far from showing rapid growth.
The government was worried exporters may have already
started to take a hit from the won's sustained climb
against the major currencies, especially the Japanese yen, as a
result of prodigious monetary easing in advanced countries.
"There is usually a bit of a lag before exports start
factoring in (the yen-won exchange rate)," Deputy Minister for
Trade Han Jin-hyun told reporters.
"Based on what we have been told, local companies are seeing
a big hit on their profitability and we believe this will
eventually affect exports," he said.
The local currency rose by 3.8 percent against the dollar on
improved appetite for risky assets, and by a sharper 16.5
percent against the yen during the fourth quarter of 2012 as the
Bank of Japan began ramping up its quantitative easing.
A firmer won should help improve conditions for domestic
demand by lowering inflation and making imports cheaper, but
sustained weakness in the property market and slowing gains from
export industries will likely offset any demand boost.
Data from the top local mortgage lender showed South Korea's
housing prices in January fell sequentially for the seventh
consecutive month, causing prices to suffer their first annual
fall in more than three years.
The HSBC/Markit purchasing managers' index (PMI) for South
Korea also showed that manufacturing activity declined
marginally in January despite a rise in new export orders,
underscoring the depressed level of demand in the country.
Annual inflation in January stood at 1.5 percent, up from
1.4 percent in December, substantially undershooting the central
bank's target range of 2.5 percent to 3.5 percent, separate
government data showed.
This subdued inflation gives the central bank room to cut
interest rates further with low risk of stoking price pressures,
and this could also help curb the won's strength by lowering
expectations for quick returns from investing in South Korean
The Bank of Korea in January kept the benchmark rate
unchanged at 2.75 percent for a third consecutive
month, but slashed its 2013 growth and inflation forecasts,
leading analysts to predict at least one more rate cut.
"The Bank of Korea is going to cut interest rates because
price inflation isn't expected to go up and the won is
eventually going to keep strengthening," said Meritz Securities
economist Park Hyung-jung.
"Other Asian countries, like India most recently, have been
cutting rates or are preparing to. South Korea most likely will
follow that trend."
(Additional reporting by Christine Kim; Editing by Choonsik Yoo
and Eric Meijer)