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Permalink Reply by stephanemot on March 20, 2011 at 11:18am

Many factors, including intense speculation, partly tamed by a massive intervention from G7 members.

 

Regarding Korea, the impacts are already felt at the financial, insurance, or industrial levels.

 

At the FDI level: more than a few Western companies are weighting their future in the archipelago. There's a trade off between security issues, and Korea is getting a closer attention (Kim Jong-il and co almost seem safe compared to a nuclear plant located on the very seashore of a tsunami prone era, and on a very active seismic fault). Typically, these days, regional HQs may move from Tokyo to either Seoul or Singapore.

 

Permalink Reply by Steven S. Bammel on March 20, 2011 at 8:48pm

I don't think that the difficulty or non-difficulty of living in Korea would be a decisive factor. I'm thinking the decision of where to locate a regional office would be related more to strategic decision at headquarters.

Permalink Reply by Steven S. Bammel on March 21, 2011 at 9:49am

Granted, Seoul's not London or Paris, but it's not Pyeongyang or Ulan Bator, either. It's pretty a dynamic place that's getting better all the time. There's plenty of opportunity for employees to be happy around here.

Permalink Reply by Lara Tosh on March 21, 2011 at 12:49pm

...AND relatively LOTS  of people speak at least a little Japanese -which is totally free of the high effective filter that serves as a concrete barrier when English is involved (ie: very few Koreans get freaked out when they are in a situation involving the need /choice to use  Japanese .)

Permalink Reply by Lara Tosh on March 21, 2011 at 4:21pm

THAT sounds like a new discussion thread!!!

...details please!  ...I look forward to seeing your post ^.~

 

Permalink Reply by Steven S. Bammel on March 21, 2011 at 9:47am

Stephane - Speculation might be a small factor, but it's not the main cause of the long-term Japanese high yen problem. That's been going on for WAY too long to be blamable on that. Here's a chart that shows what I mean:

Link to original article: http://bing.joinsmsn.com/?pc=&kwd=%22G7+%EC%98%A4%EB%8A%98+%EA%...

 

Permalink Reply by Steven S. Bammel on March 20, 2011 at 12:02pm

BTW, here's the presentation from the forum I was at this week which got the gears moving in my head to initiate this discussion.

 

 

Attachments:

• Sustainable Foreign Investment Attraction Strategy (GyeongGi Province Discussion, Marhc 17, 2011), Omsbudsman.pdf, 5.6 MB

Permalink Reply by Steven S. Bammel on March 20, 2011 at 8:50pm

In my judgment, the rising yen trend is far too long-term to be related at all to outsider's expectations of whether Japan will pull out of its slump or not.

Permalink Reply by Lara Tosh on March 21, 2011 at 12:46pm

I just saw this discussion -thanks for posting the question, Steven.  I was wondering the same thing myself, but lack all but a VERY basic finance-related background.  AND, thanks "guys" for providing a few answers ^.^

Permalink Reply by Ondrej Slechta on March 26, 2011 at 3:39am

The endaka (円高) phenomenon has been attracting attention since late 1980s as it often seems to contradict economic theories.

 

Economics is not an exact science and impact of many variables is not easily testable and measurable. This is complicating study of endaka in terms of differentiating between short run and long run as 1990s and 2000s brought a series of short run events which interrupted LT trends.

 

First of all, in terms of short run view, Steven is right when linking repatriation of yen to currency strengthening. This has been repeatedly happening for several reasons during the past 20 years and it is one of the main driver behind every short run yen appreciation. For instance:

- Japanese banks were repatriating investments in the late 1980s and during the 1997 crisis in anticipation of increase in bad debt levels

- Japanese private investors were converting their assets to yen during times of economic slow-downs to create a "safety cushion"

- economic turbulences in the West resulted in anticipation of drop in interest rates in the hit regions which led to massive unwinding of carry trades

- yen was perceived as a relatively safe currency during the recent turmoil in Europe and the USA

- as mentioned above, following the recent events insurance companies are pulling back their foreign investments as they will be paying most if not all the proceeds in yen

 

I don't have a fixed view on the long run part of the picture though. Dividend payments seem to mostly fit into the short run picture.

So just a couple of ideas:

One potential driver for endaka periods was most likely changes in real (vs. nominal) interest differentials

Based on Harrod & Balassa's productivity differential model, another driver could have been increase in productivity within export oriented part of the Japanese economy

Yet another simple explanation is that the markets were consistently over-stating Japan's ability to return to growth and accumulated yen holdings in expectations of further future appreciation which led to overpricing yen.

Some researchers also point to negative correlation between the yen rates and energy prices.

 

Most likely the long term trend is a combination of all the above drivers (and some more).

 

As for Korea, I do not believe Korea would be experiencing a kind of long term Korean endaka (i.e. "원고" - just conceived the term :-) for the same reasons as outlined above. As of today KRW is in a different situation compared to JPY as it is not a major international and freely convertible currency. Correlation between USD/KRW, USD/JPY and major events also suggests a slightly different dynamics.

Permalink Reply by Steven S. Bammel on March 26, 2011 at 5:30pm

Thanks, Ondrej.

It's interesting that your link the repatriation of yen to a short-term view. Perhaps I'm showing ignorance here, but I'm not sure I can agree with you this.

Sure, short-term appreciation is surely the result of short-term repatriation. But I'm talking about the long-term imbalance between the over-investment by Japanese companies overseas and underinvestment in Japan itself by Japanese companies AND foreign companies. This leads to the expectation that Japan will have to buy yen to pay themselves on income from overseas assets or to liquidate those overseas investments over a long period of time, and perhaps the long-term high yen is in anticipation of this, no?

I can see how high productivity in the export orientated part of the Japanese economy could be a small factor, but the trend in Japan for a long time now has been to move industry out of the country, which reinforces my point in the previous paragraph and reduces the effects of the alleged ultra-high productivity within Japan itself.

I have no idea why yen rates vs. energy prices, interest differentials or market over-expectation of future Japanese growth would be anything but short-term phenomena that could just as likely go the other way. I would also point out that whether or not the Korean won is freely convertible should also not be a long-term trend factor.

Permalink Reply by Ondrej Slechta on March 27, 2011 at 12:57am

Steven,

I see a couple of issues in the above hypothesis. First of all, 2 following assumptions are made:

- "all repatriated dividends are exchanged to yen" - this is not the case because the companies often use profits from overseas operations to fund further foreign expansion without converting the proceeds to yen. Also, many Japanese companies are listed on non-Japanese exchanges and pay dividends in other currencies. Lastly, even if the dividends are paid in yen, they would be partially converted back to foreign currencies by foreign investors or Japanese investors seeking currency diversification.

- "capital flows attributable to repatriated dividends always off-sets all other capital flows (carry trades, profit taking by foreign investors, trade etc.)" - I don't have any numbers at hand but I don't think this is the case as if it was, and if yen's fundamental value was getting weaker with net FDI outflow (and expected dividends repatriation), Japanese companies would stop investing abroad to strengthen their competitive advantage (i.e. no FDI > no dividend repatriation > weak yen).

I do not see this happening. In fact, the opposite is true. If we take a look at the other side of the coin and assume that net FDI receivers would see their currencies plummeting in the long run due to (expected) dividend repatriation, we would see all emerging markets currencies constantly dropping against currencies of main investors. Evidence suggests the opposite is happening, eg. there has been a long term upward trend in case of all major CEE currencies yet these CEE countries are net FDI receivers. 

In fact, Japanese and Korean companies invest abroad to hedge themselves against appreciating yen and won. So, rather than seeing appreciating yen/won as something that is de facto caused by FDI and expected dividend repatriation, I see increase in outbound FDI being the result of local (Japanese, Korean) currencies appreciation. The more yen and won will appreciate, the more will the Japanese and Korean companies invest abroad to retain their price competitiveness and to prevent their profitability from eroding.

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