This report details the drastic yen depreciation affecting Korea’s export recovery, the instability of the foreign-exchange market, and the introduction of a Tobin tax. 
    Since the launch of the Abe Administration, the Japanese yen is rapidly depreciating. The implementation of the Sequester, Southern European bank insolvency (the Cyprus crisis), and Italy’s political turmoil appear to be imposing further constraints on the global economy, which is already showing a weak recovery. With the stalled recovery of the global economy and yen depreciation slowing the improvement of Korea’s export conditions, the pace of Korea’s economic recovery is expected to be determined by domestic demand.
    Due to the recent moves to reinforce quantitative easing in the US and Japan, the Korean won remains strong. In addition, won-dollar exchange rate fluctuations have increased considerably compared to other major currencies during financial crises, in contrast to ordinary times. The strong won is expected to lead to reduced exports and increased imports, while the drastic yen depreciation is projected to incur damage on small and mid-sized firms. Judging by the Lehman Brothers debacle, Korea’s exchange rate volatility increase (3.67 times) during financial crises compared to normal times turned out to be the highest among the 20 comparable countries (2.35 times on average). This signifies that the nation’s foreign exchange market may suffer a staggering blow in times of crisis. Current macro-prudential instruments are mostly focused on holding short-term foreign currency borrowing in check. However, the macro-prudential system and taxation system in force are insufficient to control foreign investment once foreign capital (656 trillion KRW in 2012) invested in the domestic financial market starts to ebb away. The introduction of a two-step Tobin tax can be a solution to preventing abrupt outflows of foreign portfolio’s local investments. A Tobin tax is imposed on foreign exchange transactions to cut risks triggered by hot money used in international speculation and better control volatility in the foreign exchange market. The introduction of a two-step Tobin tax can be effective in compromising the possible blow Korea’s stock market and foreign exchange market may experience due to greater volatility deriving from foreign capital. For instance, tax exemption or lower tax rates (0.001-0.005%) can be applied at normal times, and the tax rate can be raised to 10-30% during crises.
     
Won Dongah