Korea Seen Resisting Rate Cut as Won Threatens Exports

The Bank of Korea may refrain from cutting rates at its first meeting since President Park Geun Hye’s election even as Asia’s best-performing currency of the past year threatens exports and a weakening yen aids Japan.

All 10 economists surveyed by Bloomberg News forecast borrowing costs will remain at 2.75 percent on Jan. 11. At the same time, seven of 16 economists in a separate survey see a 25 basis-point reduction by March.

The government led by incoming President Park already plans a fiscal boost in the first half of the year by allocating 72 percent of budget spending for 2013, or about $200 billion. In Japan, new Prime Minister Shinzo Abe is driving down a yen that has fallen around 20 percent against the won in the past year, aiding Japanese exporters of cars and electronics. South Korea’s currency is up 9.3 percent against the dollar.

“The economy is on a recovery path but the tepid momentum is making policy makers pretty nervous, as their latest decision on fiscal front-loading suggests,” said Lee Sang Jae, a senior economist at Hyundai Securities Co. in Seoul. “We may see a rate cut in March or April if there is no clear sign of faster and sustained economic recovery.”

The won led gains in Asian currencies last week after the U.S. averted $600 billion of tax increases and spending cuts, easing the risk of a slowdown in the world’s largest economy. The South Korean currency gained 0.6 percent against the dollar and 3.2 percent against the yen.

Japanese Rivals

Automaker Kia Motors Corp. is among South Korean companies that may be hit by gains in the won and weakness in the yen because of their competition with Japanese rivals, Daiwa Capital Markets said in a report last month. South Korea’s exports unexpectedly fell in December for the first time in three months.

The Japanese government will announce around 12 trillion yen ($136 billion) in fiscal stimulus this month to boost the nation’s shrinking economy, the Yomiuri newspaper and Kyodo News both reported today.

Korea’s technology companies, shipbuilders, and automakers could be the biggest losers from strength in the currency against the dollar and the yen, while steelmakers and utilities would benefit, Daiwa said. Samsung Electronics Co., the world’s biggest maker of televisions and mobile phones, competes with Japan’s Sony Corp. Kia, the nation’s second-largest carmaker, said Oct. 26 that won gains may hurt the company’s profitability.

Conglomerate Sales

The nation’s 30 largest conglomerates accounted for 84 percent of exports in 2010, according to the latest available figures from the Federation of Korean Industries, which represents the nation’s biggest companies.

An increasing number of bond dealers are betting on a rate cut as early as this week, and yields on government debt have begun to reflect such expectations, said Kong Dong Rak, a fixed-income analyst at Hanwha Investment & Securities Co.

“If policy makers share the view that the economy will rebound too weakly and slowly, with a strengthening won limiting exports, they may decide to take preemptive actions, employing all possible stimulus both from fiscal and monetary fronts simultaneously,” Kong said.

The yield on South Korea’s 2.75 percent bonds due 2015 was 2.74 percent on Jan. 4, falling below the central bank’s benchmark rate, according to Korea Exchange prices. It rose three basis points, or 0.03 percentage point, to 2.77 percent today.

Ending Deflation

Japan’s newly installed prime minister said on Jan. 1 that the most urgent issue for his country was to break out of currency appreciation and deflation. “Bold” monetary policy is one of the three prongs of his economic measures, Abe said. The yen extended its longest weekly losing streak since 1989 against the dollar in the five days through Jan. 4.

The weakening yen may help companies including Nissan Motor Co., Toyota Motor Corp. and Sony who have complained a strong currency is hurting profits. The yen is still about 15 percent stronger than its 10-year average of 101 per dollar.

“We are way long from what I consider a neutral territory” of about 100 yen to the dollar, Nissan President Carlos Ghosn told reporters during a year-end briefing. “Please bring it back to the neutral territory so that we can do our job without a handicap.”

Policy makers from Thailand and Indonesia will also meet to decide on rates this week. The Bank of Thailand will keep its one-day bond repurchase rate unchanged at 2.75 percent for the second consecutive meeting on Jan. 9, according to all 16 economists surveyed by Bloomberg. It had unexpectedly lowered rates in October.

Thai Exports

Thai export growth is forecast to accelerate to 8 percent to 9 percent in 2013, from as much as 5 percent last year, Srirat Rastapana, director-general for the Commerce Ministry’s Department of International Trade Promotion, said Dec. 26. Thai central bank Governor Prasarn Trairatvorakul has said shipments of items from rice to electronics are expected to recover in the first half of this year and “really grow” in the second half.

“The global economy has stabilized and is showing signs of picking up, so there is no reason for the central bank to cut the rate now,” said Thanomsri Fongarunrung, an economist at Phatra Securities Pcl in Bangkok. “Inflation is not a big issue now, so there is no need for tightening yet.”

While consumer price gains accelerated to a 13-month high in December as subsidies failed to counter rising prices of food and fuel, the central bank uses core inflation to guide policy and expects price gains will stay below its target of 3 percent this year. Core prices, which exclude fresh food and fuel costs, averaged 2.09 percent last year.

Indonesia Inflation

Bank Indonesia, with the second worst-performing currency among Asian emerging markets last year, will be among central banks in the region with the greatest challenges in 2013 as it grapples with inflation pressures, according to a Bloomberg survey of economists last month. Policy makers will meet on Jan. 10.

The central bank has kept borrowing costs unchanged at 5.75 percent for 10 straight meetings, seeking to bolster its currency as rising imports and declining exports led to a widening current-account deficit and a $478 million trade gap in November. Deputy Governor Hartadi Sarwono said in November that the central bank may “gradually” increase the rate it pays lenders on overnight deposits, known as the Fasbi, to help reduce volatility in the currency.

The rupiah has dropped almost 7 percent against the dollar in the past 12 months. It reached 9,785 on Jan. 2, matching the weakest since September 2009, according to prices from local banks compiled by Bloomberg.

Power Tariffs

President Susilo Bambang Yudhoyono’s administration will raise power tariffs by an average 15 percent in 2013 starting this month.

“Inflation this year is set to increase modestly caused by rising electricity and minimum wages,” said Helmi Arman, an economist at Citigroup Inc. in Jakarta. “Monetary policy will remain shaped mostly by external balance developments, and the possibility of a Fasbi rate hike is still on the cards.”

Elsewhere in Asia today, Taiwan’s inflation unexpectedly quickened in December, while exports rose 9 percent last month from a year earlier, according to a Finance Ministry report. The European Union’s statistics office is forecast to report producer prices rose at a slower pace in November from a year earlier, and Romania’s central bank will keep borrowing costs unchanged, surveys showed.

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