Seoul policy leeway may boost won against yen

South Korea's economy has its fair share of problems but, paradoxically, this may be the moment for the Korean won to rise against the Japanese yen. Trading on Tuesday around 14.37, a test of the bottom of the base of the yen/won's weekly ichimoku cloud (currently 14.2052) might open the way to an eventual move to the 100-week moving average, presently 14.0212. The logic behind taking such a position may appear counter-intuitive but it boils down to the fact that while both Japan and South Korea's economies have problems, Seoul arguably has more policy tools available to stimulate local demand. Pulling those policy levers might give the South Korean economy some traction and draw in won-positive investment flows while Japanese authorities have far less room for maneuver. The South Korean economy undoubtedly finds itself in troubled waters. Exports in July fell 8.8 percent from a year earlier, the sharpest fall in nearly three years, customs data showed. Inflation in July slid far more than expected to a more than 12-year low, and left the central bank with room to cut benchmark interest rates from their current 3 percent at their September meeting. The Bank of Korea's surprise cut in interest rates in July caught markets unaware but analysts polled by Reuters favor a further move next month. The fact that the central bank can cut rates further, and the finance ministry in Seoul is already set to raise public spending by more than $7 billion for the rest of this year to support growth, should give the local economy a lift. The comparison with Japan is telling. Japan's economy expanded just 0.3 percent in April-June. Growth in Japan's private consumption, which makes up about 60 percent of the economy, slowed to just 0.1 percent from 1.2 percent in the previous quarter. Yet unlike in South Korea, the Japanese authorities are not necessarily showing signs of urgency. Economics Minister Motohisa Furukawa said the Japanese economy "continues in an uptrend led by domestic demand," although he held out the possibility of a supplementary budget to support the economy "if necessary". Any notion that plans to double Japan's 5 percent consumption tax by 2015 will bring forward consumer demand might hold water for years nearer the move but not for 2012. As for monetary policy, minutes of the Bank of Japan's July 11-12 meeting showed on Tuesday that no policy options should be ruled out. But the possibility of a further tweaking of the BoJ's asset buying program is unlikely to set the consumer's pulse racing. Consumer confidence worsened in July, according to a Cabinet Office survey. Traders know Japan does not wish to see a stronger yen. Finance Minister Jun Azumi said on Aug. 7 that the government would extend its dollar credit facility, aimed at helping companies invest overseas, by six months as part of its efforts to cope with a strong yen. Such measures and regular rhetoric from Azumi about yen strength underpin the argument for selling the Japanese currency. And while it may not be too popular with South Korea's policymakers, as it would diminish Korean exporters' competitive advantage over their Japanese competitors, Seoul's policy leeway may seal the case for selling the yen against the won. from:arabnews