With the continued depreciation of the yen, concerns about Japanese investment into Korea have been rising.

The rapidly weakening yen was devalued by more than 20 percent against the dollar between October 2012 and March 2013 from 79.03 yen to 94.93 yen per dollar. This is due to Japan’s quantitative easing policy, which has been actively carried out since the Liberal Democratic Party took power and which aims for an inflation rate of 2 percent.

In the short term, there is no need to worry about a decrease in Japanese investment flowing into Korea, as the parts and materials industry, a major sector for Japanese investors, remains relatively solid against short-term currency fluctuations. This industry requires large-scale capital investment depending on medium- and long-term forecasts.

If the yen were to continue to depreciate in the long term, however, many expect the financial service industry to see a decrease in profit due to fluctuations in foreign exchange rates, and the manufacturing industry to also see a decline in FDI with an increase in Japan’s domestic investment due to improved export profitability.

Of course, this view is reasonable and noteworthy. However, the current Japanese economy and its yen depreciation make for a complex equation. Since the inauguration of the Abe administration, economic indicators have improved. The 35 percent increase of the Nikkei average from 2 percent and the 33 percent increase in the number of foreign tourists compared with a year earlier are examples that appear to prove the success of Abenomics.

However, in the words of Banri Kaieda, the president of the Democratic Party of Japan, “Every medicine has side effects. So far, it is only the price that has increased.”

Other aspects should also be taken into account. Though individual disposable incomes have certainly increased due to the recent rise in stock prices, most of this applies to people over the age of 60 who save more than spend. This leads to banks investing in bonds and eventually hinders the virtuous circle of increased income revitalizing the real economy by boosting consumption and investment.

Also, for companies, though the rise in stock prices was enough to significantly raise prices on book-value ratio, return on equity remains low. With strong demand for the distribution of enterprise value for stockholders, investment became necessary. However, as it is uncertain how long the quantitative easing will continue with the accelerating decrease in population, worsening population aging, declining domestic purchasing power, and weakening competitiveness in some domestic industries, Japan may have no choice but to consider active foreign investment rather than relying on yen depreciation.

According to a recent survey of major Japanese companies that can be understood in a similar context, many say the recent situation is a strong indication of a short-term shift in climate and that it will take more than two years to have an impact on Japan’s economic fundamentals.

At this point in time, Invest KOREA is carrying out medium- and long-term investment promotion activities in major sectors that contribute significantly to the development of domestic industries. Nowadays, with end product companies being a significant driver of business for parts and materials companies in electronic industries, and with continued demand from large domestic companies, Invest KOREA’s approach ― one centered on Japan’s parts and materials industry ― is likely to remain effective in attracting FDI.

Cooperation between promising Japanese parts and materials companies and domestic global companies, as well as creating a win-win environment, could pave the way for continuous investment. Moreover, Invest KOREA plans to bolster investment-attracting activities for logistics and service companies that can create high added value by connecting with manufacturing businesses centered on parts and materials.

By Han Ki-won

The writer is commissioner of Invest KOREA at the Korea Trade-Investment Promotion Agency. He also serves as the treasurer of the American Chamber of Commerce in Korea. He formerly served as the global head of equity capital market and head of investment banking in Japan and Europe at Daiwa Securities, and as the managing director of DC Advisory Partners. The opinions reflected in the article are his own. ― Ed.