Japan and Korea Insulate From Oil Shocks

by: Gary Dorsch

BOJ chief Toshihiko Fukui is closely monitoring crude oil prices and the direction of overseas economies, which could pose a risk to Japan's continued economic growth. On April 17th, Fukui said, “It's highly likely that the Japanese economy will achieve long-lasting, sustainable growth. The BOJ is committed to implementing monetary policy in an appropriate manner to respond to changes in the economy and prices.”

With crude oil prices soaring to a record 8800 yen per barrel, and the US dollar tumbling by 3.5-yen to 115-yen in the past few days, the Bank of Japan could decide to slow down its tightening campaign at a moment’s notice, to help immunize the Nikkei-225 stock index from the 24% oil price shock since March 20th. The Ministry of Finance would be happy to see 10-year JGB yields below 2%. Futures traders in Singapore might decide to cover some short positions in Yen Libor contracts.

US Oil in Japanese Yen compared to the Nikkei 225 Index:

Despite a 21% surge in crude oil prices to a record 71,200 won per barrel, the Korea Composite Stock Price Index [KOSPI] rose to a fresh record high of 1,451 points on April 21st. Signals from the Federal Reserve of ending the two-year climb in interest rates raised hopes for ample global liquidity. Strong global liquidity has been a key factor in the sustained rally in emerging markets, including Korea in recent years.

Bank of Korea chief Lee Seong-tae said on April 7th that Asia's fourth-largest economy would maintain its growth momentum despite high oil prices. “With economic fundamentals showing a continued recovery, there is no change in our stance to adjusting loose monetary policy.” The BOK left its overnight loan rate unchanged at 4% on April 7th, to insulate the Kospi from oil price shocks.

US Oil in Korean Won compared to the Korean Kospi Index

South Korea, the world’s fourth largest oil importer, buys 81.7% of its crude oil from the Middle East, of which 8% comes from Iran, and has 111 days worth of strategic oil reserves to help insulate it from unforeseen external developments. In the event of an Iranian cut-off of its 2.6 million bpd of exports, the United States has 123 days of oil reserves, while Japan and Germany can fuel their countries for 141 and 116 days respectively, without importing more fuel.