South Korea, Asia's fourth-largest economy, has announced its first fiscal stimulus package in four years to help shore up growth threatened by the slide in the Japanese yen. Korea is a major Asian exporter, with foreign sales accounting for half of the economy.
The yen has fallen by a fifth against the Korean won in the past six months. GDP rose by just 1.5% year-on-year in the fourth quarter, the slowest pace since the global financial crisis. The government's stimulus package is worth 17.3trn won (£10.1bn), or 0.4% of annual GDP.
What the commentators said
It's not only North Korean sabre-rattling that has made South Korea's KOSPI index Asia's worst performer this year, said Josh Noble in the FT. As Japan's exporters, long used to grappling with high export costs, get a boost, their Korean rivals "are expected to be the biggest losers", especially as the export environment is subdued anyway.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Overseas shipments declined marginally last year, their first fall in three years. But compared to the firepower the Bank of Japan is bringing to bear on the yen, this package is "a small plate of kimchi against a restaurant kitchen full of sushi", as Ian King put it in The Times.
While there is ample scope to borrow more to fund future fiscal boosts overall public debt is a mere 36.2% of GDP, while this year's deficit will be around 1.8% such packages largely affect the domestic economy and don't influence the exchange rate. The Bank of Korea could help by cutting interest rates, making won assets less appealing, but it is reluctant to loosen policy further.
Still, Korea's competitiveness hasn't suffered too much of a dent yet, according to an RBS note. There is "considerable product differentiation" across the countries' exports, reducing the scope for price competition. Korea competes head-to-head in cars and integrated circuits, but these two sectors account for under 15% of Korean exports.
And as Noble noted, the rise in the won hasn't been that significant yet: the 20% increase against the yen of the past six months follows a 50% fall in the previous four years. Korean industry shouldn't panic just yet.
-
FTSE 100 hits record highs – why is it rising and will we see more gains?Advice UK equities have been described as unloved for a long time but as the FTSE 100 hits new highs, we explain if now is the time to buy British.
-
How to invest in copperIt may be time to invest in copper as the red metal appears poised for a big jump. Dominic Frisby looks at what should investors should buy
