[New Year's Address] Lee Changyong: "Limits of K-Shaped Recovery, Need to Foster New Industries... Late 1,400s Exchange Rate Excessive"

Growth Rate Expected at 1.4% This Year Excluding IT Sector
Need to Diversify Growth Base Through New Industry Development
Exchange Rate in Upper 1,400 Won Range Significantly Out of Line with Economic Fundamentals
National Pension Service's Overs

Lee Changyong, Governor of the Bank of Korea, emphasized that the anticipated 'K-shaped recovery' for the Korean economy this year is "by no means sustainable" and stressed the need to "diversify the growth base through the development of new industries." Regarding the recent surge of the won-dollar exchange rate to the upper 1,400 won range, he highlighted that this is "significantly out of line with the fundamentals of our economy." He also stated that the impact of the National Pension Service's overseas investments, which have been cited as a factor behind the high exchange rate, should be re-evaluated in terms of their effect on the overall national economy. With a high degree of policy uncertainty expected again this year and intensifying conflicts among policy variables, the Bank of Korea plans to conduct monetary policy with greater precision by closely monitoring a wide range of economic indicators.

Lee Changyong, Governor of the Bank of Korea. Photo by Yonhap News

Warning Against 'Sectoral Concentration,' Emphasizing New Industry Development... Need to Re-examine Supply-Demand Imbalances Behind High Exchange Rate

Governor Lee made these remarks during his New Year's address at the '2026 Kick-off Ceremony' held at the Bank of Korea in Jung-gu, Seoul, on January 2. The Bank of Korea forecasts that Korea's growth rate this year will be 1.8%, approaching the potential growth rate of just under 2.0%. However, excluding the IT sector-which is expected to drive growth this year thanks to the global semiconductor cycle-the growth rate would be only 1.4%, indicating a significant gap with perceived economic conditions. Lee stated, "This kind of 'K-shaped recovery' is by no means sustainable or a complete recovery," adding, "We must continue efforts for structural transformation, such as diversifying the growth base through the development of new industries, to prevent a recurring pattern of growth and recovery concentrated in specific sectors."

He further emphasized that the exchange rate, which soared to the upper 1,400 won range at the end of last year, is significantly out of line with the fundamentals of our economy. He explained, "The main factors behind the high exchange rate include growth and interest rate differentials between Korea and the United States, as well as the 'Korea discount.' To address these, we need to strengthen the competitiveness of domestic industries and improve capital market systems to attract more investment over the medium to long term." However, he also pointed out, "Since October last year, the depreciation of the won has outpaced the movement of the US dollar, largely because the continued increase in overseas securities investments by residents has caused a supply-demand imbalance in the foreign exchange market, exerting significant short-term upward pressure on the exchange rate."

In this context, Governor Lee assessed that it is necessary to re-examine the impact of the National Pension Service's overseas investments on the overall national economy while also protecting the long-term returns of the pension fund. He noted that it is time to comprehensively review how the continued expansion of residents' overseas investments is affecting Korea's economic growth and the development of the domestic capital market from a macroeconomic perspective, even though each economic agent's investment decisions are based on rational expectations and judgments within the given environment. Lee warned, "If the current situation continues, we could repeatedly face a dilemma where, even amid heightened tensions in the foreign exchange market, the National Pension Service mechanically purchases dollars according to its set plan, while the foreign exchange authorities are forced to sell dollars to manage the exchange rate." He added, "Even if the rising exchange rate increases the won-denominated returns of the National Pension Service on paper, this cannot be considered a true long-term increase in the retirement assets of the Korean people."

In response to these concerns, the Ministry of Health and Welfare recently established a task force for flexible responses to strategic currency hedging, and government ministries, the National Pension Service, and the Bank of Korea have agreed to discuss building a 'new framework' for the National Pension Service's overseas investments. Lee described this as "significant progress" and expressed hope that solutions would be developed soon.

Regarding concerns that annual investments of 20 billion dollars in the United States would weaken the won, he clarified that "20 billion dollars represents the maximum amount," and that, as specified in the memorandum of understanding between the two countries, the actual investment volume will be determined within a range that does not undermine the stability of the foreign exchange market." He emphasized that it is not the case that 20 billion dollars will be mechanically sent abroad every year. He stated, "In this process, the Bank of Korea will not agree to any decision that undermines the stability of the foreign exchange market, together with the government, and this principle will be strictly upheld."

He expects domestic inflation to remain relatively stable compared to major economies, with the inflation rate staying at 2.1% as in the previous year, as demand pressure is not high. However, he cautioned that if the high exchange rate persists, inflationary pressures could rise again. Regarding the increased burden on ordinary citizens from higher living costs, he said, "It is not enough to stabilize the inflation rate through monetary policy alone," and emphasized that "for items with internationally high price levels, efforts to lower prices should also include various structural reforms, such as improving distribution systems and expanding import liberalization."

Lee Changyong, Governor of the Bank of Korea. Photo by Yonhap News

Monetary Policy Requires Greater Precision: "Timely Communication of Policy Direction Is a Key Responsibility of Central Banks"

He explained that this year's monetary policy will be managed with greater precision by closely monitoring a wide range of economic indicators, given the heightened policy uncertainty and intensifying conflicts among policy variables. He stated, "There are both upside and downside risks to the growth path, and inflation trends can also change depending on exchange rate movements. From a financial stability perspective, we must also continuously monitor housing price trends in the Seoul metropolitan area."

Governor Lee stressed, "It is a key responsibility of central banks to communicate changes in monetary policy direction in a timely manner when policy conditions change," adding, "With this awareness, we will further refine our policy communications to enhance credibility, including re-examining the operation of the Monetary Policy Board members' 'conditional base rate outlook for the next three months.'" He also said that the Bank of Korea plans to restructure the Bank Intermediated Lending Support Facility to reduce its quasi-fiscal policy role and instead use it as a complementary tool to interest rate policy. Selective and temporary support will be strengthened for vulnerable sectors such as regional small and medium-sized enterprises that are more affected by interest rate policy.

He also explained that the Bank of Korea will strengthen its role as a think tank for the Korean economy. Lee said, "The main focus of the 'Structural Reform Research Series' over the past three years has been how to raise Korea's potential growth rate, which has been continuously declining, and this is closely related to monetary policy." He stressed, "Going forward, it is important not only to identify problems, but also to demonstrate expertise and competitiveness by presenting practical solutions for restructuring, as we did last year with reports on the won stablecoin, autonomous taxi fare system improvements, and continued employment for the elderly."

To respond to the structural changes in digital finance, the Bank of Korea plans to pursue the second phase of 'Project Han River' real transactions this year. Through this, the Bank of Korea plans to support the government's project to improve treasury management using blockchain technology. The 'Bank of Korea AI language model' will also be introduced at the end of this month. The network integration project is scheduled for completion by March.