Lee Changyong: "As Governor of the Bank of Korea, We Have No Intention to Provide U.S. Investment Funds at a Level That Threatens the FX Market" (Comprehensive)

The annual $20 billion is a "maximum limit"...
The Bank of Korea is the holder and supplier
The view that "investments in the U.S. will cause long-term won depreciation" is excessive...
"Will proceed within the scope of market stability as part o

"As Governor of the Bank of Korea, let me make it clear: the Bank of Korea has no intention of providing funds (for investments in the United States) at a level that would threaten the foreign exchange market."

Lee Changyong, Governor of the Bank of Korea, addressed at the 'Price Stability Target Operation Status Check' briefing held at the Bank of Korea in Jung-gu, Seoul, on the 17th, regarding the recent depreciation of the Korean won (rise in the won-dollar exchange rate). He commented on the claim that "an annual outflow of 20 billion dollars to the United States for investment" is one of the factors, stating, "The 20 billion dollars is a 'ceiling,' and such investments are only made when there is no impact on the foreign exchange market." He further emphasized, "In particular, the bill submitted to the National Assembly this time stipulates that the Bank of Korea must supply these funds using interest and dividend income from foreign reserves, but the prerequisite is that this must be done only within a range that maintains stability in the foreign exchange market."

Governor Lee stated, "Since the Bank of Korea is responsible for these U.S. investments, the notion that this is the cause of a long-term depreciation is an overstatement. As part of our responsibilities, we will consult closely with the government regarding the amount of foreign currency remitted, to ensure such situations do not occur. Since these are the Bank of Korea's foreign reserves, we will manage them properly."

Lee Chang-yong, Governor of the Bank of Korea, is speaking at a press briefing on the 'Price Stability Target Operation Status Check' held at the Bank of Korea in Jung-gu, Seoul, on the afternoon of the 17th. Bank of Korea

If the High Exchange Rate Persists, Next Year's Inflation May Rise to 2.3%... "Polarization in Growth, Another Crisis"

According to the Bank of Korea, the consumer price inflation rate from January to November this year was 2.1% year-on-year, a slowdown compared to the same period last year. However, it rose to the mid-2% range recently, recording 2.4% in both October and November. This was due to a temporary increase in travel-related service prices, rising prices of agricultural, livestock, and fisheries products due to worsening weather conditions, and higher petroleum prices caused by the high exchange rate.

Excluding food and energy, the core inflation rate hovered around 2% in the first half of the year. In August, service prices were affected by a temporary discount in telecommunications fees, which acted as a downward factor, while in October, a surge in travel demand acted as an upward factor. Recently, the core inflation rate has dropped back to 2.0%, and other underlying inflation indicators have also remained stable, with the average of these indicators staying near 2% (2.0% in November).

The Bank of Korea forecasts that next year's consumer price inflation rate will reach 2.1%, as presented in last month's economic outlook, with supply-side pressures easing despite improving domestic demand. However, the Bank of Korea cautioned that if the won-dollar exchange rate remains at its current high level, inflation could remain elevated. The Bank of Korea assessed that if the current high exchange rate, around 1,470 won, continues, it could raise the consumer price inflation rate by 0.2 percentage points. Applying this to next year's forecast (2.1%) means the rate could rise to 2.3%.

Governor Lee noted, "Although the current exchange rate level is very different from the foreign exchange crisis when we could not repay external debt, it can still be considered a crisis in another sense, given its significant impact on prices, and this is a serious concern." He added, "A high exchange rate creates both winners and losers. While strong exports help sustain the economy, importers face difficulties. I am deeply concerned that this situation exacerbates the challenges for domestic demand, self-employed individuals, and the construction sector, leading to polarization in economic growth."

Trends of exchange rates as an upward factor and international oil prices as a downward factor for next year's consumer prices. Bank of Korea

Domestic Factors Such as Recent Supply-Demand Imbalances Are Significant... "Not Blaming Individual Investors, But Identifying Causes"

Governor Lee stated that he is monitoring not only the volatility but also the level of the current exchange rate. He believes that internal factors, such as supply-demand imbalances, play a significant role in why the Korean won alone has entered a depreciation phase. He explained, "I believe there are unnecessarily large depreciation swings due to domestic factors, so adjustments may be possible not only in terms of volatility but also in the level of the exchange rate."

In this context, he assessed that the decision to "coordinate National Pension Service policies" will help improve supply-demand factors. The National Pension Service recently announced that it would adjust its investment guidelines, taking into account both long-term returns and market conditions. Governor Lee said, "I am very grateful that the Ministry of Health and Welfare and the National Pension Service have agreed to coordinate policies with consideration for macroeconomic impacts. Although it will take time for government measures to take effect, I expect improvements in supply-demand factors."

He also addressed the viewpoint that "individual investors investing overseas are to blame" for the recent rise in the exchange rate, clarifying that the aim is to identify causes, not assign blame. Governor Lee said, "I do not deny that long-term factors such as the growth rate gap and interest rate differential between Korea and the United States, as well as the Korea discount (undervaluation of the Korean stock market), have contributed to the significant depreciation of the won. However, correcting these issues will take considerable time, and as a policymaker, I cannot simply say that these are long-term problems. In the short term, supply-demand factors need to be managed. I hope this analysis of causes is not seen as blaming any particular group."

(From left) Lee Changyong, Governor of the Bank of Korea; Kim Woong, Deputy Governor; and Lee Jiho, Director of the Research Department, are speaking at the press briefing on the "Price Stability Target Operation Status Check" held at the Bank of Korea in Jung-gu, Seoul, on the afternoon of the 17th. Bank of Korea

National Pension Service's New Framework: "Strategic Opacity Should Be Enhanced and Macroeconomic Ripple Effects Considered"

Governor Lee noted that it may take time to reach a conclusion on the National Pension Service's "New Framework," which is being discussed by a four-party consultative body involving the Ministry of Economy and Finance, the Ministry of Health and Welfare, the Bank of Korea, and the National Pension Service. He stated, "Fundamentally, the problem is recognized, but each ministry has different views on how it should change, and the Ministry of Health and Welfare and the National Pension Service must make the decision, so it will not be resolved in a day or two. Even before its introduction, we are working to implement policies that stabilize the market while striving to introduce the new framework." He added that the Bank of Korea plans to provide the Ministry of Health and Welfare with theoretical research to help reach a conclusion.

Governor Lee highlighted three points he hopes the new framework will address. He said, "When it comes to the timing of starting and stopping foreign exchange hedging by the National Pension Service, the decision-making process is transparent, which sets expectations in the market. I hope strategic opacity will be enhanced. There also needs to be a change in how the performance and returns of the National Pension Service are assessed, which are currently viewed only in won terms." He continued, "While high returns may look good when investing overseas, when the funds are brought back and the won appreciates, returns can fall. The case of Taiwanese insurance companies making large-scale overseas investments without hedging in May and June, only to suffer significant foreign exchange losses as the currency appreciated due to increased exports, is highly instructive." Governor Lee stressed that this is an issue individual investors should also consider.

He also pointed out that the macroeconomic ripple effects of the "major player" National Pension Service need to be reconsidered. Governor Lee said, "Ten years ago, when individual overseas investments were low, the National Pension Service's overseas investments contributed positively to portfolio diversification for the country as a whole. However, recently, I believe it is time to consider the macroeconomic ripple effects in areas such as inflows into the domestic stock market and domestic employment when managing assets."