Despite official statements against rapid currency depreciation in Japan and Korea, policymakers likely view a weaker currency as a beneficial stimulus. With negative output gaps and competition from China, the goal is not to reverse the trend but to manage its pace to avoid market disorder and US Treasury scrutiny.

North Asian economies, despite current account surpluses, exhibit balance-of-payments dynamics typical of deficit countries. This is caused by exporters holding dollars, domestic capital outflows, and foreigners hedging equity investments. This structural imbalance acts as a powerful headwind for regional currencies, overriding positive trade data.

Despite a massive positive shock from semiconductor exports, South Korea's currency (the won) has weakened. This is partly because retail investors are taking their profits and buying US tech stocks instead of reinvesting domestically, creating capital outflows that offset the strong current account surplus.

Contrary to economic fundamentals, East Asian currencies are weak. This paradox is driven by complex financial flows, including foreign investors hitting concentration limits in booming stock markets and pension fund outflows, which are currently overriding strong trade balances.

Mike Lowe notes that Korea's surging current account surplus is being transmitted into won conversion through domestic expenses rather than trade alone. Two memory makers face taxes worth 5% of GDP, staff bonuses of 2% of GDP, and big dividend commitments, requiring heavy won conversion before spring shareholder meetings.

The Israeli Shekel has reached historically expensive levels compared to its Asian tech-geared peers like the Taiwanese Dollar and Korean Won, diverging from historically stable relationships. This, combined with palpable central bank and exporter concern over its strength, makes the Shekel a prime candidate for a valuation-driven reversal against its Asian counterparts.

The memory of events like the 1997 Asian financial crisis instills a deep-seated fear of running deficits. This trauma drives countries like South Korea and China to prioritize export surpluses for stability, even if it creates global imbalances and is suboptimal for the world economy.

The common assumption that a trade deficit must cause currency depreciation is flawed. A collapse in a country's domestic demand can also correct the imbalance by reducing imports. This explains the weak correlation between real exchange rates and trade balances, as both relative prices and demand levels are key factors.

Historically, China devalued its currency to boost exports. Now, facing international pressure over its massive trade surpluses, Beijing is allowing the renminbi to gradually appreciate. This represents a significant regime shift in its economic and geopolitical strategy.