Among the Group of 20 (G20) economies, the currencies of Japan, China, and South Korea have shown the lowest values. The prolonged low-interest rate policy in Japan and the trade conflict with the United States in China appear to be significant influences. South Korea, which heavily relies on exports, is currently being hit by the spread of protectionism. Notably, in November of last year, when Donald Trump was confirmed as the presidential candidate, South Korea showed the most significant impact. There are concerns that the decline in currency value may intensify if President Trump takes office.
◇ Real effective exchange rate: Japan at the bottom, followed by China and South Korea
On the 4th, the Bank for International Settlements (BIS) reported that according to its survey of 64 countries, the real effective exchange rate index for the three East Asian countries was the lowest at the end of November last year, when former U.S. President Trump won the election.
Japan's real effective exchange rate index was recorded at 70.65 (2020=100), the lowest. China followed with 91.58 and South Korea with 93.1. This indicates that, compared to the base year of 2020, their currency values have dropped by approximately 30%, 8%, and 7%, respectively.
The real effective exchange rate is an index that indicates how much purchasing power a country's currency has relative to other currencies. If the index exceeds 100, it indicates that the currency is strong compared to the base year, while a value below 100 indicates a weak currency.
Particularly compared to October of last year, the real effective exchange rate indices for the three countries fell sharply in November. This marks the first simultaneous decline in the currency values of the three countries in 10 months since January of last year. South Korea saw the largest drop of 0.59, followed by Japan (-0.58) and China (-0.46). Notably, Japan and South Korea have seen a consecutive decline since October of last year (Japan -2.26, Korea -1.16).
The currencies of the three countries have entered a phase of depreciation since 2020. Japan, which has maintained a negative interest rate for eight years, was the first among the three to show weakness. The Japanese yen dropped below 100 after falling from 99.75 in September 2020, reaching a low of 69.87 in April last year. The South Korean won followed suit, turning weak from 99.04 in August 2021, while the Chinese yuan weakened due to deteriorating investor sentiment resulting from U.S.-China tensions, starting from 99.41 in October 2022.
In addition to the existing downward trend, the effect of former President Trump's election has compounded the situation, leaving the currencies of South Korea, China, and Japan in a weakened state. They have fallen even below countries like Russia (95.24) and Israel (96.11), which are currently facing war. The decline is greater than countries like Brazil (102.34), which has seen credit default swap (CDS) premiums surpassing 200 basis points (1 basis point = 0.01 percentage points) due to fiscal health issues, and France (95.68), facing a government collapse crisis for the first time in 62 years.
◇ Weakness of Asian currencies continues even after Trump's inauguration
Experts note that the weakness of Asian currencies may persist even after the election of Trump, who is set to take office on January 20. This is due to the potential stagnation of the disinflation trend, influenced by proposed 'universal tariffs' (taxes of up to 20% on imports) or large tax cuts. Such measures could slow down the Federal Reserve's (Fed) interest rate cut pace, leading to a stronger dollar.
In particular, South Korea, which has the highest dependence on trade and is experiencing increased political uncertainty due to recent states of emergency and impeachment, is expected to see even more weakness in its currency. According to the Economic Statistics System of the Bank of Korea (ECOS), the value of the won on December 31 of last year decreased by 5.1% compared to the first business day of that month, the 2nd. This was the highest depreciation rate among the 42 countries surveyed.
China, which is engaged in a trade conflict with the United States, is also expected to experience a weakening of its currency. This is due to the possibility that China may allow the yuan to depreciate in response to the trade war. Economic media outlet CNBC reported that, based on projections from 13 investment banks including JPMorgan and Goldman Sachs, the average forecast for the offshore dollar-yuan exchange rate by the end of this year is 7.51. If this forecast holds, it would mark the first time since October 2007 that the dollar-yuan exchange rate exceeds 7.5.
However, Japan may see a moderation in currency weakness due to the potential for interest rate hikes by the Bank of Japan (BOJ). The market anticipates that the BOJ will raise the current benchmark interest rate of 0.25% at least once in January or July this year. This could reduce the current 4.25 percentage point gap in the U.S.-Japan benchmark interest rates, thereby strengthening the yen. Morgan Stanley projected that the dollar-yen exchange rate, currently around 157 yen, could drop to 140 yen by the end of June and further to 138 yen by year-end.
Experts predict that the weakness of Asian currencies is likely to continue for the time being. Park Sang-hyun, a research institute researcher at iM Securities, stated, 'If the U.S. tariff bomb policy is implemented following Trump's inauguration, the weakness of Asian currencies may persist up to the first half of this year,' adding, 'Especially for China, the damage could be substantial, putting pressure on the value of the yuan.' Cho Yong-goo, another researcher at Shin Young Securities, noted, 'The won, yen, and yuan may all face a crisis in the first quarter of this year,' while also stating, 'However, the yen may weaken less as the BOJ is expected to raise rates once in January or February.'