South Korea’s external dependence: Does the Fed have the upper hand or rather the BoJ - Natixis

Alicia Garcia Herrero, Chief Economist at Natixis suggests that South Korea’s output and prices have become less susceptible to external shocks although they remain relevant

 Key Quotes

“We conclude that South Korea’s output and prices have become less susceptible to external shocks although they remain relevant. The stronger resilience to external shocks is from a smaller role of the Federal Reserve (Fed) in explaining Korea’s output fluctuations, while its impact on Korean prices remains relatively high. This may be explained by South Korea’s declining trade relationship with the US and its reduced dependence on external funding.”

“In short, South Korea’s economy is now more immune to external shocks due to less dependence on US monetary policy. At the same time, BoJ actions are increasingly relevant, albeit marginally, probably due to Korea’s growing similarities with Japan’s export structure and the direct impact of the BoJ’s actions on the yen.”

“Our findings are particularly interesting at a time when the Fed and the BoJ’s policies are set to diverge further (with monetary policy normalization for the former and a continuation of QE for the latter). They imply that the BoJ’s continuation of its QE policy may become more of a problem for South Korea’s economic growth than the Fed’s monetary policy normalization.”