Japan vs. South Korea: What Should Investors Consider

ETF Trends

South Korea is a vibrant economy that is widely known for its high literacy rate and exporting prowess. In 2012, South Korea’s gross domestic product (GDP) was nearly twice that of many developed nations, including Switzerland, Sweden and Norway. 1 Over the years, South Korea has shifted toward exporting higher-end technological innovations that focus on cutting-edge technology as well as automobiles from global leaders such as Samsung, LG, Hyundai and Kia Motors. 2

South Korea’s economy, particularly its export industry, has been highly resilient throughout the years. As of December 31, 2012, almost 60% of South Korea’s GDP came from exports. 3 From that perspective, changes in exchange rates can impact its economy and companies—in particular the cross rate with Japan.

Competitive Landscape Japan vs. South Korea

To illustrate the importance of this currency discussion, consider this story: In his first month on the job (April 2013), South Korean minister of Strategy and Finance Hyun Oh-Seok was faced with a sharply depreciating Japanese yen as well as escalating political tensions with North Korea that could have erupted in war. While the threat of a potential nuclear event may have had significant ramifications, Hyun said, “Compared to the North Korea risk, a sliding yen is having a considerable impact on the real economy of South Korea. 4 ” This is a testament to just how important the cross currency rates of the won and the yen are to these two Asian countries and their leaders.

From the time Japan’s prime minister Shinzo Abe was elected on December 16, 2012, to May 22, 2013, the Korean won gained (and the yen weakened) almost 20% against the yen and has barely moved since then. 5 It is clear that Korean firms were impacted by the yen weakness. For the past year (from September 30, 2012 to September 30, 2013), the Japanese TOPIX generated earnings per share (EPS) growth of over 87.1%, while the KOSPI (South Korea) has EPS contraction of 4.6% over the same period. 6

The chart below details the top five Japanese and Korean consumer discretionary companies.

Year-over-Year Growth in the 12-Month Trailing EPS before Extraordinary Items of the Top Five Consumer Discretionary Companies in Japan and Korea (October 25, 2013)*

View photo

.

chart

For current holdings of the WisdomTree Japan Hedged Equity Index, please click here.

For current holdings of the WisdomTree Korea Hedged Equity Index, please click here.

View Comments (2)