Over three months ago in "South Korea Starts Currency War Rumblings; Has Japan In Its Sights [17]" we showed that the one nation with the biggest sensitivity to Japan's currency-destructive and export-promoting Abenomics policy is its close neighbor, South Korea. With nearly 60% of SK's entire GDP deriving from net exports, every percent drop in its trade balance result in a more than 0.5% hit to GDP: more than any nation in the world. And since South Korea and Japan compete for the same export end markets, there would be no bigger loser in a zero trade sum world than Seoul.
We said as much back then: "all eyes now turn to Seoul in anticipation when this final bastion of monetary stability will cave to the global onslaught and its central bank proceeds to engage Japan directly in the most acute case of global currency warfare since the Great Depression. However, as C-grade financial tabloids have explained, the currency wars, and trade wars that result, will be a win-win for everyone.... Just please to ignore the last time they resulted in war-war."
The immediate result were three months of relative silence as South Korea bit its tongue and suffered export pain, while following the broader G-7/8/20/IMF script, which ignored the actual impact of Abenomics on global trade, and was perfectly happy to "let it be" as long as the global liquidity tsunami out of Kuroda resulted in a surge in global stock markets (after all, must preserve confidence in the global Ponzi at all costs, as has happened) and as local banks scrambled to engage in an unprecedented bond carry trade also pushing European peripheral yields to record lows in some cases (in the process masking Europe's insurmountable problems even more).
However now that Abenomics is in its sixth month, and South Korea's max export pain threshold has been reached, the country no longer will stay silent. As the FT reports, "South Korea has warned that G8 leaders need to do more to tackle the “unintended consequences” of Japan’s monetary easing when they gather for a summit later this month amid mounting concerns about the knock-on effects of a weaker yen. In an interview, Hyun Oh-seok, the South Korean finance minister and deputy prime minister, said that international co-ordinated action was needed to mitigate the impact of so-called “Abenomics” on currency markets."
The weaker yen had begun to hurt South Korean exports, Mr Hyun said, and is having unforeseen spill over effects on the global economy.
“The point is that these monetary policies are having quite a negative impact,” Mr Hyun told the Financial Times.
What is ironic is that it was international coordinated action that allowed Abenomics to develop in the first place, and by doing so it alienated and explicitly damaged South Korea's trade status quo. What is more ironic is that it is finally dawning on South Korea that the "international community" has de facto sacrificed SK's long-term economic prospects to the immediate benefit of rising global stock and bond markets, which are the direct result of Kuroda's $75 billion in month liquidity injections.
In other words, Mr. Hyun has realized he is all alone, and that the international community will do nothing to change a new path, one in which Japan's economy now has no way but to see it through its sad ending, because should Abenomic fail now, this will be it for any future reflation (read reserve injection) attempts by a Goldman Sachs think-tanked BOJ. It will be up to South Korea to act accordingly, which in a world where every nation is now engaged in currency wars means only one thing: destroying the Korean Won.
Of course, diplomacy must fail first:
The G8, he said, needed to come up with ways to address the issue at its summit later this month in Northern Ireland.
“We need some kind of co-ordinated efforts to prevent these kinds of unintended side effects from [Japan’s new] monetary policy,” he said. “Whether it is intended or not, the result [of the depreciation of the Japanese yen] is quite quick.”
The impact on South Korea has been particularly acute because most of its top 10 exports compete directly with Japan. But he said similar concerns were shared by Germany.
He is looking at an uphill climb: the G-8 already made it very clear that as long as Abenomics results in rising stock markets, it won't lift a finger.
G8 leaders and finance ministers have so far stopped short of publicly criticising the moves, believing that the resumption of faster economic growth in Japan would be a greater good for the global economy and overshadow any concerns over the impact of currency swings on the country’s trading rivals.
Keen to defuse fears over the revival of what have in the past been called “the currency wars”, the G8 and G20 have both issued statements this year saying countries should target domestic growth rather than exchange rates with monetary policy. Japan insists it is doing exactly that.
Implicitly, the G-8/20 also thinks everyone else in the world is an idiot. But all this will be irrelevant if one more major export powerhouse joins alongside South Korea in formally lodging complaints. Someone like Germany. Because if Merkel also says that the 200 or so boost to the S&P is more than enough to offset marginal losses in German exports, then Abenomics may very well be on its way out.
What this means for USDJPY, already a tiny 40 pips from plummeting once the 100.000 stops are taken out, and which may well happen tonight once Mrs Watanabe wakes up and sees the carnage from Friday's closing US print, will be made very clear shortly. It also means that anyone long the Korean Won should probably be getting quite nervous right about now.