A word of warning, this is may get awfully dull for some of you awfully fast.
While going through my news files over the holidays, I was struck by a column by Bloomberg writer Andy Mukherjee. As far as the text itself, it has little to do with Korea, however some of the items he brings up from around Asia bear a striking resemblance. So before I get into it a little exposition on Korea’s economic issues.
As anyone can tell you by simply picking up a paper in Korea, the issue of property prices is a huge issue. While the causes of “the bubble” are up for debate, and if indeed if it is a bubble, one cannot deny that it is an issue taking precedence in the minds of many policy makers these days. A quick overview of the government’s recent efforts to contain prices via the Joongang:
The government has announced nine real estate-related policies since 2003, with an emphasis on raising ownership taxes, limiting loans for real estate purchases and easing transaction costs. Seoul has pledged to build 1 million new apartment homes by 2012 in order to bring down prices.
Mr. Lee said the latest decision to release information on construction costs of new apartment homes and to put a limit on sales prices did not coincide with free market principles, but said the measures were necessary…
Thursday’s announcement called on builders to release construction costs of new apartments starting in September. It also prevented banks from issuing excessive loans to fight “speculation buying” and increased the minimum ownership period for new apartments to prevent buyers from reselling for a quick profit.
Mr. Lee said that Seoul does not now plan to ease government rules on real estate.
I have never understood why the government is insisting on such baroque methods of controlling real estate inflation. The most common answer economic-wise has been to raise interest rates, thus increasing the cost of borrowing to buy real estate and thereby decreasing the demand for housing. However as recently as a couple weeks ago the Bank of Korea refused again, for six months to raise rates.
Now no doubt there could be many reasons for this all (most notably that despite the housing market Korea’s economy is in no danger at overheating with inflation at about 3%). However something a bit counterintuitive has been happening the past few months, namely the Won is going great guns versus the Yen:
The Korean won rose to a nine-year high against the Japanese yen yesterday amid widespread speculation that the yen will continue to be weak, dealers said.
The local currency ended at 769 won to 100 yen, the highest value since Oct. 24, 1997, when it ended at 762.6 won
This brings me back to Mr. Mukherjee’s column. He brings out the interesting situation in New Zealand, and some of the speculated problems around it:
It isn’t just emerging markets that are reeling from cheap global money. New Zealand Finance Minister Michael Cullen’s comment last week about a mortgage levy shows the frustration.
A tax on home loans — a proposal that Cullen said was at a “a very preliminary stage” of consideration — will make borrowing more expensive and cool the overheated property market.
Trying to achieve the same objective through a conventional interest-rate increase will only end up making the New Zealand dollar more attractive to the carry traders, who would leap to buy the nation’s currency by borrowing in yen.
…
The risk is that in the process of containing the housing boom with higher interest rates, the central bank might just push the New Zealand dollar — already the third-best-performing currency in the world in the past six months — even higher. That may stifle exports and tourism.“In a world where capital moves more freely than ever before and carry trades are increasingly popular, it perhaps makes sense that policy makers will have to start using targeted measures as opposed to general rate hikes,” says Shahab Jalinoos, Singapore-based head of Asian currency strategy at ABN Amro Bank NV.
What Mr. Jalinoos and Mukherjee are talking about is the current global finance phenomenon of borrowing cheap Japanese Yen (currently benchmarked at about half a percent point) and rolling that into other economies earning well above that. All this has lead to some countries to take more draconian measures, as Mr. Mukherjee starts off with in his column:
If Vietnam ends up imposing Thai- style capital controls, as some Asia analysts expect, the world’s richest nations must take some of the blame.
In its statement last weekend, the Group of Seven industrialized nations had a real chance to exert some pressure on the Bank of Japan by saying just how big a threat the super- cheap Japanese currency was to the world economy.
This brings me back to Korea. There has to be some of this going on here, I do wonder how much. And more importantly if things keep on going I wonder if anyone in Korea may be tempted to bring back the currency controls of the past.
Could this be a legitimate reason to blame Japan?
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16 Comments
I believe that the actual extent and effects of this type of arbitrage are overblown.
Blame Japan for what? The Korean real estate bubble? Nonsense. There is very little Japanese yen that has been tapped for investment in the domestic real estate market. A small number of domestic players were borrowing yen from Korean banks in order to convert it into Won and use the latter for local property investment, but that was small potatoes and ROKGOV has shut it down. The amounts involved were trivial.
this has been a major challenge for all of last year and does not look to let up in the foreseeable future. the strength of the won puts obvious pressure on exporters, but it is most difficult in its strength versus the yen-most notably in electronics, semicondutors, automobiles, etc. where korean and japanese companies are in the same export space.
japan’s yen (and taiwan’s dollar) have already been blamed for korea’s diminished competiveness. however, there is more than one side to this story. a weaker yen also means cheaper japanese parts for finished korean products as well as allowing korea to increase foreign FDI in other parts of asia while japan remains more conservative.
IMF.
Japan has a lot of cash and it gives easy loans to Asian countries. Also, Japanese banks buy a lot of Asian stocks.
Then, one day it pulls all of it back.
IMF crisis.
Asia is due to another one this year or the next.
Financial tsunami with many layoffs and depreciating home prices and stock market.
It is coming!
Get all your money into gold and wait for the big one. Then, buy it all back.
baduk is right.
Part of Lt. Okamoto’s 1960s deal with Japan was getting grants and a substantial amount of Japanese bank loans to fund companies that you call Jaebols in South Korea today.
IMF. Japanese banks get in trouble. South Korea and all other Asian companies tied to Japanese bank loans fall with it. Inevitable fall. This is probably just a theory (or truth) to blame Japan for an economic situation.
Baduk said:
“IMF.
Japan has a lot of cash and it gives easy loans to Asian countries. Also, Japanese banks buy a lot of Asian stocks.
Then, one day it pulls all of it back.
IMF crisis.”
First off it’s called the Asian Financial Crisis outside South Korea.
Secondly, it was the pegged exchange rate and large current account deficit made South Korea vulnerable to foreign exchange risks in the late 1990s. I don’t think the gnomes of Tokyo had much to do with that.
Thirdly, this thread is about the effects of having so much relatively cheap Yen around, not financial tsunamis and conspiracies and whatnot.
So PLEASE, let’s not change the topic.
jiwonsi,
Gnomes pulled back their pppprecious(I am imagining Grom of the Lord of Rings) money from Thailand and Indonesia in 90s. This time it will be from VietNam and China. Korea will go down and down (50% cut for everything.
For others,
this video is banned. A half-German called “Sarang” did hip-shake, they say. It looked more like ass gyration to me.
http://etv.donga.com/newsclip/.....2200001824
It didn’t look that sexy. Her height(maybe over 6feet?) is sexy. I think the group, new Babyvox, needed some hype and bribed the KBS ethics committee.
Judge Judy makes a good point about the savings realized by Korea as a result of the cheaper Japanese Yen in the scheme of things larger than the property bubble. It’s not just - or even mainly - “parts” that are at issue here, but capital equipment and technology, of which Japan is by far the biggest supplier to Korea in monetized value terms (although the US tends to get all the negative press about the so-called draining of “national wealth” that results).
Perhaps the problem with that is the premise that they are trying to control real estate inflation.
Most Politicians own land.
People tend not to purposefully devaluate their investments.
(Yes, it is hard to admit, but despite their cold black brine swishing hearts, I am implying that politicians are people)
Did any of the past schemes meant to “control real estate prices” do any thing other than raise real estate prices?
Didn’t President Noh sign off on that law two years ago to halt new apartment building?
I’ll go out on a limb and give these guys credit, they aren’t dimwits. They’re doing more or less what they want to do, not what they say they are doing.
Cool. My favorite Japanese online store has just gotten cheaper. If only I could convince my wife that I need more guitars.
Baduk demonstrates yet again the extent of his grip on reality. Foreign financiers are going to yank their funds out of China, thus triggering Asian Financial Crisis 2.0? What about China’s $1 trillion in foreign-exchange reserves?
http://www.koreaherald.co.kr/S.....210025.asp
this is how korea benefits from cheap yen loans.
recall a few months back when the talk started about the BOJ raising rates. there was doom and gloom in all the korean papers (no, not more than usual, just focused on this issue) talking about how all the SMEs would shrivel up and die b/c their cheap yen financing would dry up.
So, Dram-Man, which one would you like to blame the Japanese for? Providing cheap financing to Koreans (and just about any other least-ways enterprising nation), or engineering a realestate bubble (that’s not really a bubble, but if it was it would have been caused by greedy Koreans using the cheap financing to speculate in the bubble-7 despite the knowledge that the last time they borrowed short and lent long with foreign money they caused a financial melt-down)?
Two points:
1) For years, folks have been saying that residential real estate in Seoul is overvalued, yet the prices continue to increase. Is that a bubble, or is that an increase in market value due to consumer perception? It’s the same question that’s been raised in my hometown, Seattle, where real estate values continue to increase despite expert opinion that such properties have long been overvalued.
In Seoul’s greater metropolitan area, one of the most important factors propelling real estate prices is public perception regarding the quality of an area’s educational system. Of course, other factors come into play - brand, total pyeong size, and convenience of location, to name a few - yet it is the perception of the quality of an area’s educational system which provides the foundation upon which all these other factors are built.
For years, education has been an integral element in keeping Kangnam real estate prices high. Pangyo, due in part to its geographic proximity to Kangnam, is considered attractive, yet even within Pangyo distinction in real estate prices exist between its eastern and western sides over the issue of educational services provision. Mokdong, also considered to have a good educational system, has seen its real estate prices climb while other areas more closely located to the central business district have not increased as rapidly.
Which returns us to the original question: is Seoul’s residential real estate overvalued? To answer that question, try asking a parent here if their child’s education is really worth that parent’s investment, and judge their response. Truly, it is that response which drives the real estate market here, and so long as the burden of debt may be shouldered, folks will shoulder it.
2) Dram_man, weren’t you telling us just a short time ago to sell KWON ahead of some big fall which was sure to come after the NK nuke test? Now, which way did you say the wind was blowing again?
Leapin’ Lizards, Dram_man, that’s rather a lot of issues to uncork in a single post. Property bubble, government intervention in real estate market, Kor/Jap interest and exchange rate differentials, global Yen-driven global carry trade and the prospect of currency controls… - I must balk, but before I do, let me share with the interested a couple of excellent places to follow the tremendous imbalances that have sent hundreds of billions, nay, trillions of dollars sloshing around the world in search of investment opportunities, and causing often-unjustified asset inflation in the process. Yen carry trade, central bank dollar reserve accumulation and property bubbles are all covered:
http://www.rgemonitor.com/blog/setser
http://www.morganstanley.com/views/gef/index.html
I never had claimed to be a FOREX expert, as gbnhj’s aptly pithy remark can attest. I just wanted to point out some of the parallels in the article vs. the situation in Korea (e.g. housing market, rather complex market cooling tools rather than blunt interest rates, unwilling to raise rates, and a rising won/yen value. I do not know what effect or consequence the Yen has on these exactly, but thought I would kick it out here since the parallels were interesting.
On a more darker side, I am worried about currency controls. In a way Korea is already beginning such with respects to FDI and other foreign monies. And in my experience, given the bent of the body politic in Korea, if you can conceivably blame Japan for something…watch out.
Dram-man you are probably familiar with the impossible trinity condition - that it is not possible to simultaneously have 3 things: independent monetary policy, capital mobility, and fixed exchange rate. The Korean govt appears to be intervening in the FOREX market to ensure a stable won, and capital moves fairly freely into Korea, depriving the authorities of control over domestic interest rates. So, increasing interest rates to cool a real estate bubble would merely attract in foreign investment, thereby increasing the supply of capital, and bidding down the interest rates to the original level. The Korean govt could give up exchange rate stability in order to raise domestic interest rates, allowing the won to appreciate. But one of the winners from a strong currency is the local non-tradeables sector (including housing), so this would do little to help cool the bubble. A cheaper Won would help, by attracting investment out of housing and into export manufacturing. Capital controls would impede efforts to improve competitiveness of profitability of the Korean financial sector - and don’t appear too likely.