The weaker yen is slowly hampering South Korea’s growth momentum, with the country’s industrial output falling 2.6 per cent in March from February.

The latest data marked a fall for a third straight month, clouding the country’s economic outlook. Industrial production fell 3.0 per cent last month from a year earlier, severely undershooting market estimates, as labour unions at Hyundai Motor, the country’s largest automaker, refused to work on weekends.

The data came a day after Kim Young-bae, director general at the Bank of Korea, said that the weaker yen is likely to have a bigger impact on South Korea’s economy from this quarter. The country’s first-quarter gross domestic product rose 0.9 per cent from the previous quarter, marking the fastest pace in two years, the BoK estimated last week.

But economists say Tuesday’s output data raises the prospect that the BoK may have to revise down the first-quarter GDP data. “Today’s data suggest a risk that Korea’s real GDP may be downgraded slightly for the first quarter,” says Kwon Young-sun at Nomura.

And the weak data is set to add pressure on the BoK to cut interest rates next month. “Still, our base line call is for no rate cuts through 2013, but we see substantial risks that the BoK is forced to cut rates by 25 basis points at its May 9 meeting,” adds Kwon.

The country’s low inflation, which was just 1.3 per cent year-on-year in March, gives the BoK plenty of scope to cut interest rates, as Asia’s fourth-largest economy grapples with the weaker yen and slowing global demand. Exports grew 0.2 per cent in March from a year earlier, rebounding from an 8.6 per cent drop in February, but analysts expect its daily exports to fall back again in April, as the yen’s weakness dents Korean exporters’ price competitiveness abroad.

Kim Choong-soo, the BoK governor, said last week that the yen’s weakness will continue for a while with its negative effects on Korean exports yet to be fully realised. The Japanese yen has depreciated about 25 per cent against the Korean won over the past year, benefitting Japanese companies directly competing with Korean rivals in various sectors including chips, chemicals and autos. The government has cut the country’s growth rate for this year to 2.3 per cent, following a 2 per cent expansion last year.

But Kim has resisted pressure from the government so far, saying the current interest rates of 2.75 per cent are accomodative enough. The $15bn stimulus package, unveiled by the government earlier this month, also reduces some pressure off the central bank to cut rates further. The government has already announced measures to prop up the stagnant property market and is set to unveil measures this week to spur corporate investment.

However, it remains to be seen how long the BoK can ride out such government pressure, if the economy continues to slow.

Related reading:
South Korea growth hits two-year high in first quarter
, FT
Distress spreads in South Korea
, FT
S Korea: GDP boost alleviates rate cut pressure on bank
, beyondbrics

Get alerts on Emerging markets when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.

Follow the topics in this article