(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 exporters
By Se Young Lee
SEOUL, Feb 1 (Reuters) - 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 rates soon.
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.
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 bonds.
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)