Currency War II: Consequences and Implications for Korea

A renewed move toward competitive quantitative easing in advanced economies, such as the United States, EU, and Japan, is fueling concerns about a new currency war. The excessive liquidity is now flowing into emerging economies, including Korea, whose sovereign credit rating has been rising, and is placing upward pressure on the currencies of those economies. For Korea, the concurrence of the yen devaluation is aggravating the negative impacts of the won appreciation on its economy, since Japan is one of Korea’s major competitors in the global market. To cope with this situation, the Korean government needs to introduce additional measures, including interest rate cuts and strengthening currency swap lines, to decelerate the pace of won appreciation and reduce currency volatility, while pursuing international cooperation through the G20. In the medium and long term, Korea needs to enhance its non-price competitiveness of exports and reduce its excessive reliance on exports by boosting domestic demand. The strong won can serve as an opportunity to bolster the ever-sluggish domestic demand. However, major policy reforms such as fostering fair and transparent distribution channel, pro-active competition policy, tax reform are imperative in order to take advantage of the strong won as a catalyst in enhancing domestic demand.