금융시장
JPY/USD forecasts and risk management of yen currency loans
2011-06-20SONG, Kyung-Hee
목차
요약
Backgrounds
This report is purposed to forecast JPY/USD afterwards the earthquake in Japan. Furthermore, through forecasting, this report is expected to offer a better perspective on the future course of the global financial market and facilitate more effective risk management of yen currency loans in Korea which amount to about KRW 18 trillion.
● This report is to look into potential impacts of the massive earthquake in Japan on the yen-dollar exchanger rate.
● The review may also cast light on significant issues of the global financial market, like whether there will be more carry trades and whether Japan will face budget crisis down the road along with their
● Furthermore, it is also expected to provide insights on risk management to lending financial institutions and yen currency borrowers in Korea whose loan amount stood at USD 16.3 billion (KRW 18 trillion) as of August 2010.
JPY/USD Exchange Rate Forecast
Despite the devastating earthquake, the yen-dollar rate is likely to go downward in the mid to long-term, considering deflationary pressure in Japan and years of current account surplus.
● The empirical analysis using exchange rate determination model showed that a number of factors play in the yen-dollar rate, including gaps in money supply, long-term interest rate (expected inflation), short-term interest rate, GDP, and trade balance between Japan and the US.
● JPY/USD is likely to go downward (i.e. appreciation of yen) in the mid to long-term, considering deflationary pressure in Japan and a persistent trend of C/A surplus.
● Although a relatively low growth rate or interest rate in Japan should push the rate upward (i.e. depreciation of the yen), statistical analysis indicates their impacts will be smaller than those of deflationary pressure or persistent current account surplus in the mid to long-term.
● In addition, there will be more pressure from a weakening status of the dollar as the world's key currency, its depreciation in addressing global imbalances, and upward pressure on currencies of countries with current account surplus.
Still, with Japan's budget deficit and other vulnerabilities exposed after the earthquake, the yen-dollar exchange rate may fall at a slower pace.
● The falling of the rate is likely to decelerate, as Japan will experience less deflationary pressure and smaller current account surplus in the aftermath of the earthquake with its budget deficit and other vulnerabilities further highlighted.
● As profits from carry trades are mainly generated from interest arbitrage and foreign exchange arbitrage, there is only a limited chance that carry trades will grow again given the long-term outlook for yen appreciation, although low interest rate in Japan is more likely to persist for a while.
KRW/USD Exchange Rate Forecast
The KRW/USD rate is likely to drop faster than the JPY/USD, considering relatively higher interest rate, economic growth, stock price growth, and current account surplus in Korea than the US.
● The empirical analysis based on exchange rate determination model pointed to the same factors with those for the JPY/USD rate: gaps in money supply, long-term interest rate (expected inflation), short-term interest rate, GDP, and trade balance between the two countries, with one exception of domestic and international stock price gap having an impact on the KRW/USD rate.
● The rate is expected to continue its downward trend but at a slower pace, as the gaps in interest rate, economic growth rate, stock price growth, and current account surplus between Korea and the US become narrower, although Korea will continue to maintain higher rates or surplus than the US.
● Meanwhile, the Japan earthquake's impacts on the Korean economy will be most visible in the current account balance. In the near term, Korea may enjoy more exports to make up for production disruption in Japan, but the impacts are not likely to be significant in the long term, as Japan gets back to normal production levels or disrupted supply of Japanese parts creates a clot in Korean companies' production or exports.
KRW/JPY Exchange Rate Forecast
While the KRW/USD w ill fall faster than the JPY/USD, the KRW/JPY is expected to move downward gradually with stronger coupling of the won and the yen.
● Given the KRW/USD and JPY/USD forecasts, the KRW/JPY is likely to record a gradual downward trend.
● The won-yen coupling is now observed again after it was until the mid-2000s after Korea adopted a floating exchange rate system. With continued competition between Korea and Japan in the export market as well as weakening of carry trades, the won-yen coupling is expected to become stronger, which in turn will lead the KRW/JPY rate to depreciate relatively smaller.
KRW/JPY Exchange Rate ForecastWhile the KRW/USD w ill fall faster than the JPY/USD, the KRW/JPY is expected to move downward gradually with stronger coupling of the won and the yen.
● Given the KRW/USD and JPY/USD forecasts, the KRW/JPY is likely to record a gradual downward trend.
Risk Management for Yen Currency Loans
Diverse measures for currency risk management to support companies with yen currency loans should be put in place.
● As of August 2010, yen currency loans in Korea amounted to USD 16.3 billion (KRW 18 trillion), most of which were taken out at lower than 1,000 won/yen and put a mounting burden on borrowers at the current rate, necessitating effective risk management.
● In this regard, following measures are recommended: i) better alerting borrowers on risks from currency rate and interest rate changes, ii) regularly updating them on their risk profile, iii) offering hedging products such as currency conversion option, iv) examining borrowers' currency risk management ability to decide loan eligibility, and v) implementing safe measures against the risk of growing loan principal, such as redeeming partial loans or requiring more collateral.
● Though, in principle, loss in foreign currency exchange from yen currency loans should be covered by the borrowing companies, lending financial companies should consider multi-faceted measures to provide the currency risk management solution for borrowers.
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