South Korea's monetary and economic policymakers on Monday picked the earlier-than-expected exit from quantitative easing in the United States and the depreciation of the Japanese yen as top external uncertainties facing the South Korean economy.
"In case the reduction or the end of the U.S. quantitative easing is made visible, negative effects will not be small on international financial markets and emerging market economies as well as our economy," the Bank of Korea (BOK) said in a report to lawmakers.
Touching on the May rate-cut decision, the bank selected the weak yen as the main reason behind the decision, saying that it also sought to boost the policy mix effect by cutting rates when the government unveiled stimulus measures.
The BOK lowered its benchmark interest rate by 25 basis points to 2.5 percent at the May rate-setting meeting. The Finance Ministry announced a supplementary budget plan worth 17.3 trillion won (15 billion U.S. dollars) in mid-April to stimulate the sluggish economy in the early period of the Park Geun-hye government.
The Finance Ministry said in its parliamentary report that new risks emerged in the global economy such as exit from quantitative easing in advanced economies and the future direction for Abenomics, or the economic policy advocated Japanese Prime Minister Shinzo Abe.
The Abenomics has been viewed as causing the Japanese yen's depreciation against the U.S. dollar as well as the South Korean won, worsening the price competitiveness of South Korean exporters that are fiercely competing with Japanese rivals in overseas markets.
"The prolonged weak yen trend caused by the Japanese government's aggressive stimulus policies would possibly have negative effects on our financial markets and small exporters," Financial Services Commission (FSC) Chairman Shin Je-yoon told lawmakers.
The top financial regulator noted that the change in the U.S. monetary easing stance would have great impact on the global financial market such as the strong dollar and interest rate rises globally.