South Korean won banknotes of various denominations are arranged for a photograph in Seoul, South Korea, on Tuesday, Dec. 11, 2012

The won dropped to a 14-month low on Thursday amid rising expectations that South Korea will intervene to cushion the impact of a rapid slide in the yen.

The won fell as much as 1 per cent in intraday trade to hit Won1,094.5 per US dollar, the weakest level since September 2013. The South Korean currency has fallen 2.6 per cent over the past five days, making it the second biggest decliner in the region. However, the yen has fallen even further in that time, dropping 4.8 per cent.

The sharp fall in the won was triggered by comments from Joo Hyung-hwan, vice-minister of finance, which suggested the government may take action in response to the recent sell-off in the Japanese currency. Earlier this week, the yen touched Y9.39 against the won, its weakest point since late 2008.

“We’re monitoring the yen’s move and managing the won and yen to move in sync,” state news agency Yonhap quoted Mr Joo as saying at a National Assembly session.

South Korea and Japan compete directly in many sectors such as steel, automobiles and electronics, making currency movements a key consideration for export competitiveness. The yen dropped to a fresh seven-year low of Y115 against the US dollar on Thursday morning before bouncing back slightly in afternoon trading.

Local authorities have expressed discomfort with the yen’s rapid decline, fearing the weaker yen will hurt the price competitiveness of rival South Korean exporters such as Hyundai Motor in overseas markets.

Analysts say central banks across Asia– particularly in export-driven economies – may decide to weaken their own currencies in order to counter the effects of the falling yen. A round of competitive currency depreciations in Asia could have serious ramifications across the developed world by lowering the prices of consumer goods at a time when inflation is already very low.

But Mr Joo’s reported comments heightened expectations of possible government intervention to weaken the won in the foreign exchange market.

“Market participants have become more wary of such a possibility following [his] comments, as we have seen some smoothing operations by the government recently,” said Song eun-jeong, a currency strategist at Woori Futures.

South Korea’s finance ministry said it was unable to confirm Mr Joo’s comments, noting that the correlation between the won and the yen had become stronger following the Bank of Japan’s move last week to expand its stimulus programme.

The ministry added that the government was stepping up its monitoring of the foreign exchange market as the yen continued to fall against the dollar.

“We are not trying to manage the forex rate but just try to reduce volatility when there is a sudden shift in the market,” said Choi Hee-nam, head of the ministry’s international finance bureau.

The falling yen has also fuelled speculation the Bank of Korea may choose to cut interest rates again at its policy meeting next week. South Korean government bonds advanced on Thursday with yields dropping to their lowest in 14 years.

Minutes from the BoK’s last meeting – at which the central bank cut rates to a record low of 2 per cent – indicated policy makers were paying close attention to the yen.

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