Meanwhile
Why Korea needs a stronger won
Japan’s post-Fukushima yen surge offers a lesson as the won stays weak despite Korea’s solid growth, trade surplus and market gains.
Kim Sung-jae
The author is a business administration professor at Furman University and the author of “The Story of Tariffs” (2025).
In March 2011, a magnitude 9.0 earthquake and tsunami devastated northeastern Japan. The Fukushima nuclear disaster followed, supply chains were disrupted and the economy slipped into recession. Yet the Japanese yen strengthened.
Factories producing key components and materials for the automobile and electronics industries were concentrated in the disaster zone. Their shutdown disrupted supply chains, while rising energy imports pushed Japan’s trade balance into deficit.
Japan’s economy, which had been recovering the previous year, contracted by 0.5 percent. To contain the downturn, the Bank of Japan lowered its policy rate to a range of zero to 0.1 percent and expanded liquidity through large-scale asset purchases.
Despite the recession and lower interest rates, the yen surged. The dollar-yen exchange rate, which had been around 95 yen per dollar a year earlier, strengthened to 76 yen by September 2011. Compared with its 2007 level of 124 yen per dollar, the Japanese currency had appreciated by more than 60 percent.
One reason was the repatriation of overseas assets by Japanese insurers seeking funds for disaster compensation payments. The unwinding of yen carry trades, in which investors borrowed low-interest yen to buy higher-yielding foreign assets, added further upward pressure. Global speculative capital betting on yen appreciation accelerated the trend. As a result, the exchange rate moved well beyond levels justified by economic fundamentals. Persistent deflation also supported the yen by raising its real purchasing power.
Korea today appears to face the opposite situation. Yet the disconnect between economic fundamentals and exchange rates is remarkably similar.
Led by semiconductor exports, Korea recorded 3.6 percent growth in the first quarter. Its current account surplus exceeded $100 billion over the past four months, placing it among the world’s leading surplus economies. The stock market has also posted one of the strongest gains globally.
Nevertheless, the won-dollar exchange rate has risen above 1,500 won per dollar, leaving the Korean currency more than 10 percent weaker than a year ago.
Foreign investors’ sales of Korean stocks are often cited as the main cause. Yet it is difficult to rule out the role of speculative investors betting on a weaker won through positions linked to Korean assets. If the currency remains weaker than fundamentals warrant, import prices will rise and inflationary pressure will intensify, increasing costs for households and businesses.
During the Clinton administration, U.S. Treasury Secretary Robert Rubin promoted a strong-dollar policy that helped attract capital while supporting growth and stability. Korea should likewise pursue a stronger-won policy to prevent capital outflows and strengthen the foundations of sustainable growth.
Japan’s currency remained strong in 2011 even as its economy faltered. Korea’s currency is weak today despite economic expansion. Exchange rates ultimately reflect confidence. The real question is not how fast an economy grows, but how much markets trust it.
