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 of the Bank of Korea's duties"
If the high exchange rate persists, next year's inflation rate could reach 2.3%...
0.2 percentage points higher than the forecast
"Ministry of Health and Welfare and National Pension Fund coordinating policy...
Supply-demand factors expected to improve"
"As Governor of the Bank of Korea, let me be 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."
On December 17, at the 'Price Stability Target Operation Status Check' briefing held at the Bank of Korea in Jung-gu, Seoul, Governor Lee Changyong addressed concerns that one of the factors behind the recent depreciation of the Korean won (rise in the won-dollar exchange rate) is the annual outflow of 20 billion dollars for investments in the United States. He stated, "The 20 billion dollars per year is a maximum limit, and such investments are only made when there is no impact on the foreign exchange market." He added, "In particular, the bill submitted to the National Assembly this time stipulates that the Bank of Korea must provide the funds from interest and dividend income on foreign exchange reserves, but the prerequisite is that it must be done within the scope of maintaining stability in the foreign exchange market."
Governor Lee said, "Since the Bank of Korea is responsible for these investments in the United States, the view that this will cause a long-term depreciation is an excessive concern. As part of our duties, we will consult closely with the government on the amount of foreign currency remittances, etc., to ensure that such issues do not arise. Since these are the Bank of Korea's foreign exchange reserves, we will manage them appropriately."
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 Could Rise to 2.3%..."Growth Polarization, Another Crisis"
According to the Bank of Korea, the consumer price inflation rate for 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, higher prices for agricultural, livestock, and fisheries products due to worsening weather conditions, and rising petroleum prices caused by the high exchange rate.
The core inflation rate, which excludes food and energy, hovered around 2% in the first half of the year. In August, it was affected by a temporary discount on telecommunications service prices (a downward factor), and in October, by a surge in travel demand (an upward factor). Recently, the core inflation rate has dropped back to 2.0%, and other underlying inflation indicators have generally remained stable, with the average of the indicators staying near 2% (2.0% in November).
The Bank of Korea forecasts that next year's consumer price inflation rate will be 2.1%, as supply-side pressures are expected to ease despite improvements in domestic demand. However, it cautioned that if the won-dollar exchange rate remains at the current high level, inflation could persist. The Bank of Korea estimates that if the high exchange rate of 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 it could reach as high as 2.3%.
Governor Lee noted, "The current exchange rate level is clearly different from the foreign exchange crisis when we were unable to repay foreign debt, but in terms of its impact on prices, it can be considered another type of crisis, and I am greatly concerned." He added, "A high exchange rate creates winners and losers. While strong exports may sustain the economy, importers face difficulties. I am particularly concerned that this could exacerbate growth polarization by increasing the challenges faced by domestic demand, small business owners, and the construction sector."
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, Including Recent Supply-Demand Imbalances, Are Significant..."Not Blaming Individual Investors, But Identifying the Causes"
Governor Lee stated that he is monitoring not only the volatility but also the level of the current exchange rate. He believes that domestic factors, such as supply-demand imbalances, play a major role in the depreciation of the Korean won. "There are unnecessarily large depreciation factors caused by domestic issues, so I think adjustments should be made not only to volatility but also to the exchange rate level," he said.
In this context, he assessed that the recent decision to coordinate National Pension Fund policy will serve as a factor improving supply-demand conditions. The National Pension Fund recently announced its intention to revise its management guidelines, taking into account both long-term returns and market conditions. Governor Lee expressed his gratitude, saying, "The Ministry of Health and Welfare and the National Pension Fund have agreed to coordinate policy with consideration for macroeconomic impacts. Once government measures begin to take effect, it will take some time, but I expect to see improvements in supply-demand factors."
He also addressed the perspective that "individual investors investing in overseas stocks (so-called 'Seohak Ants') are to blame" for the recent rise in the exchange rate, clarifying that the focus should be on identifying causes, not assigning 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' in the domestic stock market, have contributed to the significant depreciation of the won. However, addressing these issues will take considerable time, and as a policymaker, I cannot simply say that these are long-term problems. In the short term, it is necessary to adjust supply-demand factors. I hope this analysis of causes will not be 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 Fund's New Framework: "Need to Enhance Strategic Opacity and Consider Macroeconomic Spillover Effects"
Governor Lee noted that it may take time for the four-party consultative body-comprising the Ministry of Economy and Finance, the Ministry of Health and Welfare, the Bank of Korea, and the National Pension Fund-to reach a conclusion on the National Pension Fund's "New Framework." He said, "We are aware of the issues, but each ministry has different views on how things should change, and the Ministry of Health and Welfare and the National Pension Fund must make the final decision, so this will not be resolved in a day or two. Even before the framework is introduced, we are working to implement policies that stabilize the market." The Bank of Korea plans to provide the Ministry of Health and Welfare with research on theoretical grounds to help reach a conclusion.
Governor Lee identified three areas 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 Fund, the decision-making process is so transparent and the scope so clearly defined that it shapes market expectations. I hope strategic opacity will be enhanced." He also pointed out the need to change the way the National Pension Fund's performance and returns are assessed solely in Korean won. "While returns may appear high when investing overseas, if the won appreciates when the funds are repatriated, the returns decrease," he explained. "The case of Taiwanese insurance companies making large-scale overseas investments without hedging in May and June, only to suffer significant currency losses as exports increased and the currency appreciated, is highly instructive." Governor Lee emphasized that this is an issue individual investors should also consider.
He further argued that the macroeconomic spillover effects of the National Pension Fund, as a major player, should be re-examined. "Ten years ago, when individual overseas investments were limited, the National Pension Fund's overseas investments contributed positively to the diversification of Korea's overall portfolio. However, more recently, it may be time to consider macroeconomic spillover effects-such as capital inflows into the domestic stock market and domestic employment-when managing assets," he said.
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