ECON 1220 Principles of Macroeconomics Second Semester, 2011/12

1
12. The Foreign Exchange Market and Macroeconomy

1. Foreign Exchange Rates

- We define foreign exchange rate (E) as the amount of domestic currency required to
purchase 1 unit of foreign currency.
o E.g. the amount of U.S. dollar required to buy 1 euro, E = $1.307
o The price of a currency in terms of another.

- Exchange rate can also be expressed as the amount of foreign currency required to purchase 1
unit of domestic currency.
o The amount of euro required to buy 1 U.S. dollar, 1/E = 0.765

- In this course, we will use E as the exchange rate unless specified otherwise.
o An increase in E means that the domestic currency depreciates.
o A decrease in E means that the domestic currency appreciates.

Country HK$ per currency (E)

Currency per HK$ (1/E)

US Dollar (USD) 7.7661 0.1288
Euro (EUR) 10.147 0.0986
Chinese Yuan (CNY) 1.2304 0.8127
Japanese Yen (JPY) 0.09531 10.4925
British Pound (GBP) 12.325 0.0811
Australian Dollar (AUD) 7.7955 0.1283
Swiss Franc (CHF) 8.4469 0.1184

- The foreign exchange market is the generic term for the worldwide institutions that exist to
exchange or trade different countries currencies.

2. The Foreign Exchange Market

- To examine how the foreign exchange market works and how exchange rates are determined,
we consider each pair of currencies as a separate market.
o For example, the exchange rate between US$ and euro.

- Consider the bilateral transactions between two countries, say U.S. and Europe.

- People hold a foreign currency for two types of international transactions:
o International trade (i.e. imports and exports)
o International investment, such as purchases of a foreign assets (houses or stocks), making
a foreign loans (e.g. deposits or bonds).

- The demand curve for euros (assuming U.S. is the domestic country) depends on the items
generating payments to European citizens:
o U.S. Imports
o Capital outflows
Purchases of European assets, lending to Europeans

- The supply curve for euros depends on the items generating payments from European citizens:
o U.S. Exports
ECON 1220 Principles of Macroeconomics Second Semester, 2011/12


2
o Capital inflows
Sales of U.S. assets to Europeans, borrowing from Europeans

- How is exchange rate related to international trade?
o Suppose both US and Europe both produce an identical good. Given that P
US
= $7.5, P
Euro

= 5, would you prefer buying the US good or European good (ignoring transaction costs)
if:
E = $1.5 per euro?
E = $2 per euro?
E = $1 per euro?

o A change in exchange rate, other things equal, changes all the relative prices of foreign
goods to domestic goods.
- When E increases, i.e. U.S. dollar depreciates, U.S. goods become cheaper relative to
foreign goods.
- When E decreases, i.e. U.S. dollar appreciates, U.S. goods become more expensive
relative to foreign goods.

o When U.S. dollar depreciates (E increases), individuals will choose to buy more U.S.
goods (exports) and fewer European goods (imports), the demand for euro dollars will
decrease and the supply of euro dollars will increase.



- Although the foreign exchange market can be analyzed easily by the demand and supply,
governments choose whether to allow the forces of demand and supply to determine the value
of exchange rates for their respective currencies. Economists call this policy the exchange
rate regime:
o Flexible or floating exchange rates
o Fixed or pegged exchange rates
o Managed floating (a mixture of flexible and fixed)
Exchange rates among major currencies are free to float to their equilibrium level, but
the countrys central bank occasionally uses currency interventions in the foreign
exchange market to stabilize or to intervene the exchange rates.
Euro
Exchange rate (E): dollar per euro
D

(U.S. imports,
capital outflows)
S

(U.S. exports,
capital inflows)
E
*

ECON 1220 Principles of Macroeconomics Second Semester, 2011/12


3
3. Foreign Exchange Demand and Supply Determinants

- All the factors affecting domestic countrys imports and exports, and capital inflows and
outflows, result in changes in demand and supply of a foreign currency.

- Factors affecting imports and exports:
o Preferences
o Domestic income level
Increase in domestic income increases imports of the domestic country.
o Foreign income level
Increase in domestic income increases imports of the domestic country.
o Relative price levels

- Purchasing Power Parity (PPP) theory holds that exchange rates adjust to equate the
purchasing power of different currencies, i.e. the average price of goods to be the same, in the
long run. The simplest version of purchasing power parity states that:

Euro US
P E P =

o The PPP provides us with the insight how price levels in the two countries would affect
the demand and supply of the currency:
If P
US
> EP
Euro
, then people will buy more European goods and fewer U.S goods,
leading to an increase in demand for euro, and a decrease in supply of euro.

- Factors affecting capital inflows and outflows:
o Relative interest rates
o Expected change in the exchange rate

- The Interest Parity Condition
o Another approach to the determination of an exchange rate is asset-oriented. Why?
It is estimated that fewer than 5% of foreign exchange transactions reflect trade in
goods and services.
Asset decision is involved in trade-related transactions as immediate payment usually
is not required.

o How is exchange rate related to international asset allocations?
Suppose that a one-month interest rate on dollar-denominated financial assets is 10%,
the one-month interest rate on euro-denominated financial assets is 10% and the
exchange rate between dollars and euros is E = $1 per . If you have $1000, should
you buy a 1000 euro deposits or keep the funds in a dollar deposit over the next 30
days:
- if you expect exchange rate to remain unchanged at E = $1 per ?
- if you expect U.S.$ to depreciate and the exchange rate to increases to E = $1.5
per ?
- if you expect U.S. to appreciate and the exchange rate to decrease to E = $0.5 per
?

What is your return in 30 days if you:
- keep your dollar-denominated assets?
- convert your $1000 and buy a 1000 euro-denominated assets?
ECON 1220 Principles of Macroeconomics Second Semester, 2011/12


4
o Individuals must form an expectation about the future exchange rate, i.e. expected future
exchange rate E
e
, and base the asset allocation decision on that.

o When all individuals maximize their expected rate return, it will result in an equilibrium
condition called the interest parity condition
1
:

|
|
.
|

\
|

+ =
E
E E
r r
e
euro $


o The left-hand side is the return on dollar-denominated interest-bearing assets, i.e. the
interest rate on dollar-denominated interest-bearing assets, r
$
.
o The right-hand side is the expected return on euro-denominated interest-bearing assets,
which includes:
The interest rate on euro-denominated interest-bearing assets, r
euro
.
The expected capital gain in holding euro, which is also the expected rate of
depreciation in dollars, [(E
e
-E)/E].

- The interest parity condition also implies a negative relationship between exchange rate and
the demand for a currency and provides additional insight about other factors that affect the
foreign exchange market.
o The relative interest rate, r
euro
r
$
.
When the interest rate differential increases, it makes euro-denominated interest-
bearing assets more attractive, increasing the U.S. capital outflow.
o The expected future exchange rate, E
e
.
When the expected exchange rate increases, it makes euro-denominated interest-
bearing assets more attractive, increasing the demand for euros.

- It is generally agreed that the above factors have different importance in exchange rate
determination over time:
o The interest parity condition are the dominant forces determining exchange rates in the
very short run (a few weeks, a few days or shorter).
o In the long run, the PPP holds and relative price levels (inflation) are the dominant factor
determining exchange rate.

4. The Balance of Payments

- The balance of payments (BOP) accounts summarize all the transactions undertaken by
residents of one country with the rest of the world.
o Current Account
o Capital and financial Account

- What transactions are recorded in the current account?
o Net Exports
- Merchandise exports and imports
- Exports and imports of services
o Net income from abroad
o Net unilateral transfers

1
Precisely, this version of interest parity in which participants dont use forward market to transfer
exchange rate risk is called uncovered interest parity.
ECON 1220 Principles of Macroeconomics Second Semester, 2011/12


5
- Any category of the balance of payments can generate a credit or debit.
o Credit [+]: transactions that generate receipts from foreigners to domestic residents.
E.g. exports
o Debit []: transactions that generate payments from domestic residents to foreigners.
E.g. imports
o A net value with negative sign means that imports (payment by domestic residents)
exceeds exports (receipts by domestic residents) in that category.
Positive balance: Surplus.
Negative balance: Deficit.

- What transactions are recorded in the capital and financial account?
o It records international borrowing and lending (capital account), purchases and sales of
assets (financial account).
Capital inflows: Sales of U.S. assets to foreigners, borrowing from foreigners
- Credit [+]
Capital outflows: Purchases of foreign assets, lending to foreign entities
- Debit []
The capital account balance: net capital inflow = capital inflows capital outflows.

- The overall balance of payments is the sum of the current account balance and the capital
account balance:

Balance of payments (BOP) = Current account balance + Capital account balance

o BOP surplus: receipts from foreigners > payments to foreigners.
o BOP deficit: receipts from foreigners < payments to foreigners.

Balance of Payments in Hong Kong, 1997 - 2009
Year
Current Account Balance Net Change in Financial Non-reserve Assets Overall Balance of Payments
(HK$ million) As a Ratio to GDP (%) (HK$ million) As a Ratio to GDP (%) (HK$ million) As a Ratio to GDP (%)
1997
-59,836 - 4.4 N.A. N.A. 95,087 7.0
1998
19,421 1.5 -65,649 -5.1 -52,581 -4.1
1999
79,535 6.3 8,305 0.7 77,867 6.1
2000
54,494 4.1 32,503 2.5 78,321 5.9
2001
76,315 5.9 -51,674 -4.0 36,530 2.8
2002
96,800 7.6 -154,033 -12.1 -18,541 -1.5
2003
128,240 10.4 -163,205 -13.2 7,589 0.6
2004
122,512 9.5 -156,594 -12.1 25,486 2.0
2005
156,933 11.4 -166,812 -12.1 10,679 0.8
2006
178,166 12.1 -160,300 -10.9 46,735 3.2
2007
199,160 12.3 -155,086 -9.6 114,498 7.1
2008
228,125 13.6 16,314 1.0 263,869 15.8
2009 135,027 8.3 357,680 21.9 549,262 33.6

- Official settlement balance
o All transactions in the official settlements account are conducted by the official
government authorities, usually central banks, rather than individuals or firms.
Net change in a countrys stock of foreign exchange reserves and official government
borrowing (or lending)
If receipts > payments, the official settlement balance will increase.

ECON 1220 Principles of Macroeconomics Second Semester, 2011/12


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o In the balance of payments accounts, the sum of the current account balance, capital and
financial account balance and the official settlements balance must sum to zero.

5. The Balance of Payments and the Foreign Exchange Market

- To understand the relationship between the balance of payments and foreign exchange market,
we need to distinguish between:
o Overall balance of payments
- record transactions between the domestic country and the rest of the world.
o Bilateral balance of payments
- record transactions between the domestic country and one other country.
- The overall balance of payments is simply the aggregate of all bilateral balance of
payments accounts.
- The proceeds from exports and capital inflows (i.e. credit items in the bilateral balance of
payments) generate the demand for the domestic currency (or supply of foreign currency).

- The proceeds from imports and capital outflows (i.e. debit items in the bilateral balance of
payments) generate the supply for the domestic currency (or demand for foreign currency).

6. The Flexible (or Floating) Exchange Rate



- Under the flexible exchange rate regime, we can treat the market for foreign exchange as a
competitive one.
o Appreciation of US dollar: a drop in the market-determined exchange rate E.
o Depreciation of US dollar: a rise in the market-determined exchange rate E.

- Under a perfectly flexible exchange rate regime, at the equilibrium exchange rate, the credits
in the balance of payments equal debits, i.e. BOP = 0.
o Note: this does not imply both the current account and the capital account will be in
balance under a flexible exchange rate regime.
o It simply means that a current account deficit (or surplus) will be offset by a capital
account surplus (or deficit)
Euro
Exchange rate (E): dollar per euro
D (U.S. imports,
capital outflows)
S (U.S. exports,
capital inflows)
E
*

E
1

Surplus of Euro
E
2

Shortage of Euro
ECON 1220 Principles of Macroeconomics Second Semester, 2011/12


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7. The Fixed (or Pegged) Exchange Rate



- Under the fixed exchange rate regime, the government peg or fix the exchange rate at a certain
level by intervening the foreign exchange markets to buy and sell the currencies.
o Under the rules of the fixed exchange rate system, each central bank is responsible for
intervening to maintain the value of its currency relative to the foreign currency.

- Suppose U.S. decides to peg the exchange rate between euro and US dollars at E
p
1
above the
equilibrium.
o To keep the exchange rate at E
p
1
, the U.S.central bank must step into the market and buy
enough euro (or selling US dollars) to cover the surplus of euro.

- Under a fixed exchange rate regime, the credits in the balance of payments may not equal
debits:
o At E
p
1
, BOP > 0.
o At E
p
2
, BOP < 0.
o The BOP surplus or deficit must be settled by official transactions because a countrys
total receipts from foreigners must equal its total payments to foreigners.

- For intervention purposes, governments hold stocks of various foreign currencies, called
foreign exchange reserves.

o What if the central bank runs out of foreign exchange reserves?
- Borrow from other central banks or from the International Monetary Fund to continue
intervention.

- The country may reset the pegged or fixed exchange rate to a different level.
o Revaluation of USD: a drop in the fixed exchange rate E.
o Devaluation of USD: a rise in the fixed exchange rate E.



Euro

Exchange rate (E): dollar per euro
D (U.S. imports,
capital outflows)
S (U.S. exports,
capital inflows)
E
*

E
p
1

U.S. BOP > 0;
Intervention
E
p
2
21

U.S. BOP < 0;
Intervention
ECON 1220 Principles of Macroeconomics Second Semester, 2011/12


8
8. Foreign Exchange Market and Macroeconomic Policy: The Flexible Exchange Rate
Case

- Fluctuations in exchange rates affect the macroeconomy largely through their effect on net
exports.
o An increase (decrease) in net exports is a positive (negative) demand shock.

- How would the inclusion of foreign exchange market affect our analysis of macroeconomic
policy?

- Exchange rates and Monetary Policy
o Consider an expansionary monetary policy. Recall that an increase in money supply
lowers the domestic interest rate.
How would it affect the foreign exchange market?

o Lowering the domestic interest rate makes foreign financial assets relatively more
attractive to domestic assets. It increases the demand for foreign currency, resulting in a
depreciation of domestic currency.
How would it affect the net exports?

o The depreciation of domestic currency increases net exports, which increases AE and its
another positive demand shock.

o The foreign exchange market provides an additional channel to stimulate the economy by
expansionary monetary policy, so it has a stronger effect than when the foreign exchange
market is excluded from the analysis.
Note that the familiar effect on consumption and planned investment still exists.

- Exchange rates and Fiscal Policy
o Consider an expansionary fiscal policy. Recall that an increase in government spending
results in higher domestic interest rate (via the impact on money market).
How would it affect the foreign exchange market?

o Higher domestic interest rate makes domestic financial assets relatively more attractive to
domestic assets. It increases the supply of foreign currency, resulting in an appreciation
of domestic currency.
How would it affect the net exports?

o The appreciation of domestic currency lowers net exports, which decreases AE and its is
regarded as another crowding out effect.

o The foreign exchange market provides an additional crowding out effect of an
expansionary fiscal policy, so it has a smaller effect than when the foreign exchange
market is excluded from the analysis.
Note that the familiar crowding effect on consumption and planned investment still
exists.

9. Foreign Exchange Market and Macroeconomic Policy: The Fixed Exchange Rate Case

- Under the fixed exchange rate system, the central bank is required to intervene the foreign
exchange market by buying and selling their own currency, hence affecting the money supply.

ECON 1220 Principles of Macroeconomics Second Semester, 2011/12


9
- Exchange rates and Monetary Policy
o Consider an expansionary monetary policy. An increase in money supply lowers the
domestic interest rate, which makes foreign financial assets relatively more attractive to
domestic assets. It increases the demand for foreign currency, resulting in a depreciation
pressure of domestic currency.
What do the central need to do in order to maintain the fixed exchange rate?

o The excess demand for foreign currency requires the central bank to supply enough
foreign currency (i.e. buying domestic currency from the market).
How would it affect money supply when the central bank buys back domestic
currency from the foreign exchange market?

o The reduction in money supply offsets the increase in money supply (the original
expansionary monetary policy) until the relative interest rate differences are eliminated
2
.
Therefore, under fixed exchange rate system, monetary policy is ineffective.

- Exchange rates and Fiscal Policy
o Consider an expansionary fiscal policy. An increase in government spending results in
higher domestic interest rate, which makes domestic financial assets relatively more
attractive to domestic assets. It increases the supply of foreign currency, resulting in an
appreciation pressure of domestic currency.
What do the central need to do in order to maintain the fixed exchange rate?

o The excess supply for foreign currency requires the central bank to buy enough foreign
currency (i.e. selling domestic currency to the market).
How would it affect money supply when the central bank buys back domestic
currency from the foreign exchange market?

o The increase in money supply lowers the interest rate back to the original level,
eliminating the crowding out effect. Therefore, under fixed exchange rate system, fiscal
policy is very effective.

Readings:
- Chapters 29


2
This analysis of the impact of monetary and fiscal policy in this section is best suitable to explain the case
of small open economy with perfect capital mobility.
A f ount ai n of y en
I s i t dr y i ng up?
NO, SAY t he Japanese aut horit ies, policy has not changed. Speculat ion t hat t he Minist ry of
Finance' s buying of dollars on an enormous scale might be ending had pushed t he yen up shar ply
in t he week beginning March 15t h; denial brought some respit e. And on March 23rd Toshihiko
Fukui, t he governor of t he Bank of Japan, rest at ed t he cent ral bank' s commit ment t o
quant it at ive easing ie, flooding t he money market s wit h yen unt il inflat ion t urns posit ive and
looks like st aying t hat way.
And yet , despit e all t his, t he yen has been rising again. On March
24t h St andard & Poor' s, a rat ing agency t hat downgraded Japan
t hree t imes in 2001 and 2002, said it s out look for t he count ry had
bright ened, mainly because t he economy is get t ing st ronger.
Thereaft er t he yen breached 106 t o t he dollar, it s highest point for
more t han a mont h ( see chart ) .
The scale of t he Bank of Japan' s int ervent ion t o hold down t he yen
has been st aggering. During January and February, Japan spent
10.1 t r illion ( $95 billion) equivalent t o t wo- t hirds of it s curr ent -
account surplus last yeart rying t o weaken t he currency. I zuru Kat o
of Tot an Research, a t hink- t ank, believes t hat a furt her 3 t rillion- 4
t rillion has been spent t his mont h. This would bring t he t ot al so far in 2004 t o t wo- t hirds t hat in
t he whole of 2003, a record- breaking year. As a product of int ervent ion, Japan has been piling up
American Treasury bonds: it s st ash grew by $192 billion t o $577 billion in t he year t o January
31st . China' s holdings increased by only one- sevent h of t hat amount .
Currency int ervent ion is oft en a fool' s game, but Japan' s seems t o have been paying off. Paint ed
as a st rat egy t o pr event a sharp and disorderly appreciat ion of t he yen, t he policy of selling yen
and buying dollars has helped boost export er s' profit s, on which much of t he recent recovery has
been based. I t has also helped t o raise st ockmarket s and bat t le deflat ion.
The policy has also been downright profit able. Wit h Japanese int erest rat es close t o zero, t he cost
of funding t he int ervent ion by issuing short - t erm bills t o pay for dollar purchases is t iny. Dollar
int erest rat es, t hough low in hist orical t erms, are much higher, allowing t he government t o
pocket t he difference. The government already plans t o t ransfer 1. 4 t rillion of such profit s, t he
equivalent of a 0. 8% rise in consumpt ion t ax, t o it s main budget for t he next fiscal year, says
Masaaki Kanno of J. P. Morgan Secur it ies.
I n t heory, int ervent ion on a grand scale could cont inue for some t ime. There is no short age of
funds: t he limit on out st anding financing bills, previously 79 t rillion, will be raised t o 140 t rillion
from next mont h. Though t here are fears t hat t his will put upward pressure on short - t erm
int erest rat es, in pract ice, t he Bank of Japan can absorb much of t he supply. For now, t he
chances of Japan' s short - t erm int erest rat es overt aking America' s, creat ing losses for t he
government , seem small. The main risk is t hat t he yen will rise in spit e of int ervent ion, reducing
t he yen value of Japan' s dollar holdings.
And if int ervent ion should st op? Alt hough American export er s might complain about t he
cheapness of t he yen and ot her Asian currencies, t he Unit ed St at es has been a beneficiary of
Japan' s policy. I nt ervent ion has helped finance America' s t win deficit s and hold down it s long-
Japanese cur r ency i nt er v ent i on
Mar 25t h 2004 | TOKYO | from PRI NT
EDI TI ON
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2/12/2011 http://www.economist.com/node/2540126/print


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t erm bond yields. This, in t urn has fuelled t he booms in consumer spending and t he housing
mar ket t hat have pushed t he American economy along. I t might be awkward on bot h sides of t he
Pacific if t he lavish funding st opped.
from PRI NT EDI TI ON | Finance and Economics

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Page 2 of 2 Japanese currency intervention: A fountain of yen | The Economist
2/12/2011 http://www.economist.com/node/2540126/print
Mar 3rd 2012 | TOKYO | f rom t he pri nt edi t i on
Japan s cur r ency
Wonupmanshi p
Can Japan br eak t he y en- w on cur se?
THE st rengt h of t he yen, especi al l y agai nst t he Sout h Korean won, has
hel ped spat t er Japanese el ect roni cs compani es wi t h red i nk i n recent
years. Now i t has spi l l ed bl ood. On February 27t h El pi da, a Japanese
maker of DRAM memory chi ps, f i l ed t he bi ggest bankrupt cy cl ai m of
any Japanese manuf act urer si nce t he second worl d war. The mai n
benef i ci ary of i t s demi se was Sout h Koreas Samsung.
No one woul d accuse Samsung of
t hrashi ng El pi da on currency
advant ages al one. The el ect roni cs gi ant
i s ni mbl er and bol der t han many of i t s
Japanese compet i t ors. But t he yen/ won
exchange rat e has worked spect acul arl y
i n Sout h Korean export ers f avour si nce
t he st art of t he gl obal f i nanci al cri si s i n
mi d- 2008 ( see chart ) . Duri ng t hat
peri od t he won has l ost roughl y 50% i n
val ue agai nst t he yen, hel pi ng Sout h
Korean f i rms undercut t he Japanese on
pri ce and poweri ng t he count ry back t o economi c growt h. The yen,
however, has behaved l i ke a curse. The worse Japans economi c
predi cament , t he more i t s currency has st rengt hened.
That i s why Japanese export ers are si ghi ng wi t h rel i ef at a 10% drop i n
t he yens val ue agai nst t he won si nce i t s recent hi gh poi nt i n earl y
Oct ober. That has exceeded t he yens f al l agai nst t he dol l ar and t he
euro. The mai n f act or may be a change i n gl obal ri sk appet i t e: a ri si ng
won i s of t en a baromet er of ani mal spi ri t s. But currency speci al i st s say
Copyright The Economist Newspaper Limit ed 2012. All right s reserved. Legal disclaimer
Accessibilit y Privacy policy Terms of use Help
f rom t he pri nt edi t i on | Fi nance and economi cs
t hat t he yens f al l appears t o have been gi ven more moment um by t he
recent commi t ment of t he Bank of Japan ( BoJ) t o buy government
bonds unt i l i t get s cl ose t o a new 1% i nf l at i on goal , as wel l as by a
record t rade def i ci t i n January. Ni chol as Smi t h of CLSA, a broker,
bel i eves much of t he ext ra l i qui di t y coul d end up i n Japanese asset
market s: on February 29t h t he Ni kkei , Japans benchmark share i ndex,
hi t a seven- mont h i nt raday hi gh.
The BoJ i s doubt l ess more concerned wi t h yen/ dol l ar or yen/ euro
exchange rat es t han t he yen/ won rat e. I n t erms of f i nanci al
t ransact i ons t hese are f ar more i mport ant . But f rom an i ndust ri al poi nt
of vi ewand export ers compri se a powerf ul l obby i n Japant he
yen/ won rat e mat t ers j ust as much. Take t he ri val ri es of Sony wi t h
Samsung or Honda wi t h Hyundai , f or exampl e. From a Japanese
st andpoi nt , t he Sout h Koreans are f ar more cut - t hroat gl obal
compet i t ors t han Ameri can f i rms.
As f or t he f ut ure, some scept i cs doubt t hat t he meddl esome Bank of
Korea ( BoK) wi l l be abl e t o ref rai n f rom cheapeni ng t he won. But
Dani el Hui of HSBC bel i eves t he Sout h Korean currency may cont i nue
t o st rengt hen agai nst t he yen. He says t hat i s part l y because Sout h
Korea appears t o be comf ort abl e wi t h t he l evel of i t s f orei gn- exchange
reserves, and al so because export ers are conf i dent enough i n t hei r
resi l i ence t hat t hey no l onger rel y on a cheap currency. One ot her
f act or may cause t he yen t o overshoot on t he downsi de agai nst t he
won. Korean export ers have been more aggressi ve t han Japanese ones
i n t appi ng new market s such as t hose i n emergi ng Asi a; i t woul d t ake a
super- cheap yen f or t he Japanese t o cat ch up i n t hese market s,
reduci ng pressure f or a BoK response.