SEOUL, May 14 (Yonhap) -- The Japanese currency's slide is sounding alarm bells for South Korean exporters already struggling to tide over the economic slowdown as it is feared to sap corporate profitability, market watchers say.
The yen's falling trend is also making the Seoul government and the central bank closely watch cross-border capital movements as the decline could serve as a destabilizing factor in the local currency market.
The Japanese currency weakened past a key support level of 100 yen per dollar on Friday for the first time in four years. It further fell past 102 against the dollar at one point on Monday as the Group of Seven effectively tolerated the yen's slide.
The yen has depreciated more than 20 percent against the greenback since September on the back of Japan's aggressive monetary easing. In turn, the Korean won has risen around 34 percent per 100 yen since September.
Major foreign investment banks, including Credit Suisse, forecast that the yen is likely to trade past the 100 level per dollar at least for one year, according to the Korea Center for International Finance.
The yen's slide has unnerved Seoul policymakers, who are concerned that Korea's exporters may lose their price competitive edge when vying with their Japanese rivals in overseas markets. Many of Korea's key shipments, including steel and machinery, overlap with those of Japan.
"The won's strength against the yen is feared to sap Korean firms' profitability and worsen the country's balance of payment on weaker exports," said Park Sung-wook, a research fellow at the Korea Institute of Finance.
Park said local tech firms and carmakers may see limited impacts from the yen's slide as they have increased the portion of overseas production, but price-sensitive smaller firms will inevitably be hurt.
But if the yen's slide accelerates, its negative impacts on Seoul's main key export items will likely be severe, hurting the Korean economy, analysts said.
If the yen weakens to hit 110 per the dollar and the Korean won rises to the 1,000 level per the greenback, Korean companies' profit may decline by some 21 trillion won (US$18.9 billion), according to the research unit under Woori Finance Holdings Co.
It added that local shipbuilders, carmakers and tech companies will be dealt a heavy blow by the yen's potential sharp decline.
Korea's top central banker earlier said that as the yen's weakness is likely to persist for a long time, its negative impacts on Seoul's exports will be more visible down the road.
Exports account for about 50 percent of the Korean economy, which grew 2 percent last year, the slowest in three years. The government's 2013 growth estimate stands at 2.3 percent while the central bank expects the growth to reach 2.6 percent.
The Samsung Economic Research Institute estimates that Seoul's exports may decline by 2 percentage points, making Korea's economic growth fall by 1.8 percentage points if the yen falls to 100 per dollar and the won rises to the 1,000 level versus the greenback.
The Korean won was trading at the 1,100 level to the dollar after appreciating past the 1,100 mark on May 3, the first time since mid-March.
The yen's weakness has prompted the Korean government and the central bank to closely watch cross-border capital flows as it could serve as a condition to spark the so-called yen carry trade.
The yen-funded carry trade refers to the borrowing of yen at low interest rates to invest in higher-yielding and riskier assets.
Usually, the yen carry trade tends to increase when the yen goes through a period of prolonged weakness and the interest rate gap among countries widens or global market jitters ease.
"Currently, it is hard to spot conspicuous fund movements that can be called as the revival of the yen carry trade," a senior official at the Bank of Korea (BOK) said over the phone.
"But authorities are keeping close tabs on the global financial markets and cross-border capital flows."
The BOK warned in its recent report against the potential increase of the yen carry trade, citing prospects for the yen's weakness and investors' reduced bets on safer assets.
The revival of the yen carry trade could have negative impacts on countries with higher-yielding assets as it can spur asset bubbles and put upward pressure on such nations' currencies.
Speculation that the Federal Reserve may slow its pace of massive bond buying within this year could increase jitters in the global financial markets and shift global fund flows, market watchers say.
"There are chances that Japanese funds could flow into Korea, raising concerns that it could put further upward pressure on the won," said Kim Yoon-gee, a senior economist at the Daishin Economic Research Institute. "The government needs to flexibly operate its macro-prudential measures."
Korea used to undergo excessive foreign capital movements and suffer from the won's sharp weakness whenever a financial crisis has cropped up.
Since 2010, Korea has implemented a set of macro-prudential measures to ease volatile cross-border capital flows, including bank levies and tighter regulations on banks' foreign exchange derivatives positions.