High Currency Value Hurting Japan and South Korea

While much of the economic news coming out of Asia has been positive in recent weeks, with China and S.E. Asian economies looking poised for strong and stable growth, South Korea and Japan have both taken a hit. At the heart of the development is the increasing strength of the Korean won and the Japanese yen. Both South Korea and Japan heavily rely on exports and their strong currencies are starting to dampen their economies.

Even the Japanese yen, which has weakened considerably in recent months still remains quite high. Interestingly, the Japanese yen has strengthened since the early 2000′s even though the country’s economy has remained weak. In 2004 a U.S. dollar could purchase 120 Japanese yen, currently one dollar is now able to purchase only about 90 yen.

Both Japan and Korea’s modern economies were created as a result of export-driven growth. Because of their recent prosperity, it’s easy to forget that both Japan and Korea were immensely poor by the end of World War II and the Korean war. Both countries had seen their infrastructures and industries decimated. Japan had once been a proud industrialized nation reduced to rubble whereas Korea had always been a relatively poor Asian nation.

By the end of the Korean war, South Korea was poorer and less developed than most African nations. At the conclusion of World War II, Japan was trying to reevaluate its position in the world and figuring out how to build a strong nation based not on armies and colonies but on a strong economy.

The solution for raising their countries from the ashes came in the form of exports. And with the United States trying to fend off the expansion of communism throughout Asia the industrial giant was more than happy to open up its markets.

Japan grew first and created the formula to inspire other export-oriented nations. Japan focused on building high-quality products that would be in demand around the world. At first, Japan suffered many set backs. Honda Motor Co Ltd (ADR) (NYSE:HMC) and Toyota Motor Corporation (NYSE:TM) (TYO:7203), for example, both faced the looming threat of failure and bankruptcy in their early years, especially as their products were inferior to U.S. produced goods. Over time, however, Japan closed the technology gap and by the 70′s were producing many products, including cars, that were superior to American made goods.

South Korea poured national development money into supporting massive conglomerates. Familiar names, such as Samsung and Hyundai, were supported by government policies in hopes of establishing companies that could compete with Western MNCs. By all accounts many of the Japanese and Korean governments’ policies succeeded. Both Japan and South Korea were able to quickly build large industrial economies.

However, the economic rise of China and other low cost producers in the late 20th and early 21st century put both Japan and South Korea at a disadvantage. Now strengthening currencies threaten to further derail the progress both Japan and South Korea have made in recent years.

Japan posted its largest trade deficit ever, some 78.3 billion dollars in 2012. Japanese companies have been slow to adapt to changing trends, such as the rise of Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG) based phones. In the current trend Japanese are buying more foreign made products and people abroad are buying fewer Japanese products. This has contributed to Japan’s large deficits. A strengthening yen will only add to these economic woes and make it even harder for Japanese companies to compete.

South Korea’s economy is still recording a trade surplus but growth has been slowing down. In 2012 the South Korean economy grew by only 2 percent, its lowest rate since the 2009 Financial Crisis. With just over half of South Korea’s GDP coming from exports, a strengthening won could constrict South Korea’s economy even more and could potentially send the country into recession.

South Korea has seen its exports to Europe drop, while exports to the United States have stagnated in light of a weak economy and a highly competitive market. South Korea’s exports to China have also declined as the Chinese economy has weakened in recent years. A strong rebound from China, however, could bolster the Korean economy. Still with China looking to move into higher value-added production, South Korea’s long-time trading ally could become an intense competitor.

The government and business leaders in Japan and South Korea will both have to work hard to figure out how to position their countries if the fast changing global landscape. Samsung has found huge success with its smart phones, while Hyundai cars are selling better than ever.

Both companies were able to tap into global trends, but many others are lagging behind. Companies across Japan and South Korea will have to learn from successful companies, like Samsung, if they are to remain competitive in the global landscape. Meanwhile a weakening Yen in Japan may help exports rebound, though the Korean Won has been trending upwards.