Democratic Research Institute: "Active Exchange Rate Management Needed to Achieve KOSPI 5000"

"Financial Authorities Must Prepare for Foreign Exchange Market Uncertainty
Driven by Diverging Monetary Policies of Major Economies"

The Democratic Research Institute, the think tank of the Democratic Party of Korea, has suggested that active exchange rate management by financial authorities is necessary to achieve the KOSPI 5000 milestone. The institute argues that the continued rise in the won/dollar exchange rate is preventing the stock market from sustaining its upward momentum.

On December 18, the Democratic Research Institute stated in a policy briefing that financial authorities should take steps to manage the exchange rate as a policy recommendation for achieving KOSPI 5000. Lee Jaeyoung, a research fellow at the institute and author of the briefing, explained, "An increase in the won/dollar exchange rate not only negatively affects the upward trend of the KOSPI, but also leads to higher domestic prices, which adversely impacts the domestic economy. Therefore, proactive exchange rate management by financial authorities is needed."

Lee further analyzed, "When the exchange rate rises, foreign investors holding Korean assets find it more advantageous to hold dollar assets. As a result, they tend to sell Korean stocks and increase their dollar holdings, which can become a cause of a decline in the KOSPI."

He also pointed out, "In addition to falling stock prices, the rise in prices of raw materials, parts, and finished goods leads to higher import and consumer prices, which in turn drives up the cost of daily necessities such as food and energy. This increase in the price of essentials burdens ordinary households and negatively affects the domestic economy."

The government formed a task force on December 9 to stabilize supply and demand in the foreign exchange market and began preparing countermeasures. At the Fund Management Committee meeting held on December 15, the National Pension Service decided to extend its strategic currency hedging program, originally set to end this year, through next year. Currency hedging refers to fixing the exchange rate at the current level in order to guard against risks from exchange rate fluctuations during foreign exchange transactions. The National Pension Service also extended the maturity of its $65 billion foreign exchange swap agreement with the Bank of Korea by one year, through the end of next year.

Explaining these measures, Lee stated, "Our financial authorities must prepare for increased uncertainty in the foreign exchange market, which could arise from diverging monetary policies among major economies, such as an expected interest rate cut by the US Federal Reserve and a likely interest rate hike by Japan in the near future."

Additionally, to achieve KOSPI 5000, the institute emphasized the need to complete the third round of amendments to the Commercial Act and the Capital Markets Act to strengthen the rights of general shareholders, improve the methods for selecting companies for corporate disclosure and the Korea Value-Up Index, and revitalize the capital market by converting household real estate assets into financial assets.