Thanks to a weakening U.S. dollar, servicemembers in Korea may see an increase in their cost-of-living allowance.
The dollar dipped to a 34-month low against the Korean won and a 33-month low against the Japanese yen Monday. Military officials confirmed COLA rates will rise Japan.
Although the dollar rebounded slightly after sliding to a rate of 111.37 yen, it’s still low enough to likely nudge the COLA up next month in Japan, said Maj. Keith E. Muschalek, Japan country coordinator for military allowances.
“We could see a 2- to 4-point index increase over the next 30 to 45 days,” he said. “But it’s really only a guess.”
That could add $100 a month to the paychecks of military personnel stationed in Japan. COLA can fluctuate every two weeks based on yen rates.
Officials in Korea could not confirm Thursday that the COLA rate would rise.
“We definitely need COLA, especially in Japan,” said Airman 1st Class Alan Green, 24, of Yokota Air Base, who added that his COLA averages about $160 a month.
“A raise in COLA, that would be outstanding,” added Airman Jerick Nunn, 19, also of Yokota. “Off base, you will spend your COLA quickly. If you go shopping for clothing, electronics, anything, your COLA will be gone in a second.”
Dollar to won
In Seoul, the dollar was at 1,151.2 won at the end of trading Monday, following a steep decline that began in earnest in April 2003.
Allowances were offered to personnel in Korea for the first time in June, and areas like Taegu and Kunsan saw a slight increase in early July. In Seoul, the COLA has remained flat.
The disparity is due to the different costs of living in the different geographic areas.
Geographical indexes are based on the cost of 120 products in the United States vs. South Korea. Those items are weighted individually to determine a location’s COLA index.
Kunsan’s COLA index was 108 when COLA was instituted June 16. On July 1, the index increased 2 points to 110, meaning slightly more COLA for servicemembers.
Osan and Camp Humphreys went from 112 to 114 during the same period, and Taegu went from 108 to 110.
Part of the reason for the dollar’s weakening against the won is influenced by the Japanese yen, South Korean banking officials said.
According to one South Korean economist, the won rate is likely to level off.
“They better exchange dollars into won in advance,” said Yun Tae-shik, of the South Korea Finance and Economy Ministry’s International Finance Bureau.
Buying power for Americans “will be highly affected by this trend,” he said.
Yun and other South Korean economists say the rising won rate is bad for both sides: It weakens the buying power of Americans in South Korea and severely impacts Korean exports to the United States, as well as economic growth.
Government officials said Wednesday they would take steps to curb sudden currency fluctuations by issuing foreign currency stabilization bonds.
Kim Gwang-lim, second in charge at the Finance and Economy Ministry, told reporters Wednesday the government would begin “smoothing operations” if the won rises above “normal market conditions.”
Dollar to yen
The situation is similar in Japan, where U.S. Forces Japan buys yen for military banks two days in advance. It takes nearly that long to disperse the funds.
There, Friday’s military yen rate was 109, reflecting Wednesday’s market rate of 112.19 yen, Muschalek said. Exactly a year ago, the military yen rate was 121.
Muschalek doesn’t predict a huge rise in the dollar against the yen in the near future.
“I think the major market change has occurred, and we’re probably going to stabilize at about a 110 yen average,” he said. “There’s going to be more money in the pockets of people drawing COLA.”
Future COLA increases due to the weaker dollar would come on top of recent gains.
In mid-July, the military exchange rate was 117, and in August, it averaged 115, Muschalek said.
The COLA index for most bases in Japan increased Sept. 16 by two points, or about $40.
At Yokosuka, for example, the index went from 138 to 140, meaning that location is 40 percent more expensive than the average U.S. location.
At Yokota, the current index is 130. A captain there with eight years of service and two dependents earns a monthly COLA of $877.50.
The dollar hit the 33-month low against the yen on Monday, just days after the Group of 7 industrialized nations called on China and Japan to adopt more flexible exchange rates.
Economists are mixed on whether the dollar will remain weak in Asia.
Kohei Sato, a Mizuho Research Institute financial analyst in Japan, said he believes the stronger yen will continue a few months, but fluctuations won’t be as drastic as Monday’s three-point drop.
The New York Times reported this week that many experts predict Japanese leaders will be reluctant to let the dollar weaken significantly against the yen — a strong yen would increase the price of Japanese exports in the United States.
— Jennifer H. Svan and Hana Kusumoto contributed to this story.
The COLA Index
The COLA index, which varies by location, determines the pay adjustment. It’s based on rank, years of service, number of dependents and place of residence.
The allowance is paid when the average cost-of-living expenses overseas exceeds the average cost in the United States.
The Department of Defense Per Diem committee sets and adjusts military COLA as often as every pay period, taking into account fluctuations in exchange rates and local prices. The latter is determined through an annual market-basket survey of prices of goods and services on and off-base.
The military COLA index is set the first and 16th of every month.
— Staff reports
