April 18, 2017 6:00 pm JST

Increased tension on Korean Peninsula driving up the yen

Japan is odd man out as its currency rises against the dollar, yuan and won

YOICHI TAKITA, Nikkei senior staff writer

TOKYO -- The yen is the only major Asian currency that is firming amid growing tensions on the Korean Peninsula, with both the Chinese yuan and the South Korean won weakening.

In an about-face on a key campaign pledge, U.S. President Donald Trump has decided not to label China a currency manipulator. In defending his decision, Trump has indicated the move is part of diplomatic maneuvering to ensure that Beijing will support U.S. efforts to pressure North Korea into ending its nuclear brinkmanship.

Trump has demonstrated his dealmaking prowess by using the currency issue as a bargaining chip to convince China to work with the U.S. on North Korea's dangerous nuclear arms program.

The Trump administration's decision not to brand China a currency manipulator would have stabilized the currency market, except that Trump said the dollar is "too strong," which in effect is market intervention by the president. 

In response to this remark, currency market players have started betting heavily on the yen's climb against the greenback instead of targeting the yuan in selling the U.S. currency.

Out of the loop

Trump's words and actions have raised the specter of "Asakai's Nightmare" among Japanese foreign policymakers. Koichiro Asakai, Tokyo's ambassador to the U.S. from 1957 to 1963, repeatedly spoke about a nightmare scenario in which he would awake one day to news that the U.S. had abruptly recognized China without informing Japan.

Asakai's nightmare became reality in July 1971, when U.S. President Richard Nixon suddenly reversed U.S. foreign policy and reached out to China. Nixon's about-face, along with his decision to sever the dollar's link to gold, came to be called "Nixon Shock" in Japan.

Many market players in Tokyo are now speculating that the Trump administration might also make a drastic change in its stance toward Beijing, delivering a huge shock to Japan.

The yen is also strengthening against the won, which has, not surprisingly, come under strong selling pressure.

But Japanese policymakers are galled to see the yen gaining ground against South Korea's currency because of a security crisis that also affects Japan.

In the U.S. Treasury Department's latest semiannual report on foreign exchange policies of major U.S. trade partners, South Korea is on the currency watchlist along with China and Japan.

South Korea's current-account surplus is equivalent to over 8% of its gross domestic product, compared with Japan's less than 3%.

As a result, the won was on an upward trend for a while. But surging tensions over North Korea have reversed that trend, triggering massive sell-offs of the South Korean currency.

The won soared 7.4% against the dollar during the first three months of 2017, but then plunged some 3%. South Korea's JoongAng Ilbo newspaper recently carried a report that said there are not many factors that will touch off an upturn of the won against the dollar. 

Deja vu

The changing trends in the currency market are impacting the stock markets of Japan, China and South Korea.

The Shanghai Stock Exchange's benchmark composite index, which is relatively insulated from the influence of foreign investors, has been on a firm footing.

The Korea Composite Stock Price Index has also been holding up well despite deepening concerns about the situation on the Korean Peninsula.

The stock of Samsung Electronics, the country's leading exporter, has risen to record highs even though its de facto leader has been arrested for involvement in a political scandal.

The weakening won is apparently giving a big boost to South Korea's export-oriented industries.

What is happening to the Japanese currency now is reminiscent of the situation after the 2008 collapse of U.S. investment bank Lehman Brothers, which triggered a yen upswing against the dollar.

At that time, China prevented selling pressure on the dollar from pushing up the yuan by reviving its currency's dollar peg.

The won's exchange rate against the yen halved. Even after the global financial crisis subsided, Seoul kept the won artificially low through manipulative policy measures.

The crisis over Pyongyang's nuclear weapons program could put a crimp on the Japanese economy through its effects on the yen's value vis-a-vis other major currencies.

U.S. Vice President Mike Pence's visit to Japan to launch a new economic dialogue between the two countries, which starts on Tuesday, is bound to put a renewed spotlight on the yen.

Asia300

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