central bank-monetary policy report

SEOUL, April 4 (Yonhap) -- South Korea's central bank said Thursday that smaller local exporters are likely to be hit by the Japanese currency's weakness on concerns that the yen's weakening trend may accelerate in the first half.

Japan's powerful monetary easing moves have put downward pressure on the yen, making prices of Korean products more expensive in overseas markets compared to Japanese rivals. The won gained some 22.5 percent against the yen in February, compared with six months earlier.

The Bank of Korea (BOK) said in its monetary policy report that negative impacts of the yen's weakness on Seoul's exports are seen as being less severe than in the past because export prices' sensitivity to currency fluctuations has been weakening.

"More companies are moving their factories to overseas countries. Korea has diversified its export destinations and the non-price competitiveness of Seoul's exports has improved," the central bank said in the report.

But the BOK also warned that though local companies' capacity to tackle currency risks has been enhanced, the yen's weakening trend is worrisome for smaller exporters as it would sap their profitability.

"As smaller exporters largely lack the leeway to cope with currency risks, supportive actions by the government and banks are needed to minimize the impacts of the currency's volatility," the BOK said.

As for monetary policy, the BOK reiterated it will manage the monetary policy to support the economic recovery while making efforts to maintain price stability by closely monitoring economic risks at home and abroad.

The central bank froze the benchmark seven-day repo rate at 2.75 percent for the fifth straight month in March. The bank lowered the borrowing costs in July and October last year.

The bank said that its two rate cuts are estimated to have raised the 2012 economic growth by an average of 0.03 percentage point and may hike the growth by 0.19 percentage point this year. The Korean economy grew 2 percent last year and the BOK's 2013 growth outlook currently stands at 2.8 percent, compared with the government's recent projection of 2.3 percent.

The BOK said the momentum of the economic recovery is likely to "further strengthen" in the second half as external economic uncertainty is expected to ease and the global economy will moderately improve.

The BOK added that it plans to review the effectiveness of its current interest rate-based monetary policy and craft measures to make funds flow smoothly in the financial system.

"The bank plans to improve its soft loan scheme to smaller firms in a bid to smoothly funnel funds into the sectors that need help," it added.

Kim Min-ho, the director-general at the BOK's monetary policy and markets department, said that adjustments of lending criteria and beneficiaries could be considered to enhance the soft loan framework.

The BOK's soft loan scheme is one of its main tools for financial inclusion by expanding loans to small and medium enterprises with low rates when the economy slows down.

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