[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 Overseas Investments Should Be Re-examined for Impact on the National Economy
'New Framework' Underway, Improvements Expected Soon
Monetary Policy to Be Operated with Greater Precision Through Close Monitoring of Economic Indicators

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, which is slightly below 2.0%. However, excluding the IT sector-which is expected to drive growth this year thanks to the global semiconductor market-the growth rate is projected to be only 1.4%, suggesting a significant gap with the public's perception of the economy. Governor Lee stated, "This kind of 'K-shaped recovery' cannot be regarded as sustainable or as a complete recovery, and we must continue efforts for structural transformation, such as diversifying our growth base through the development of new industries, to prevent a repetitive pattern of growth and recovery concentrated in specific sectors."

He 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 our economic fundamentals. He explained, "The main factors behind the high exchange rate include the growth rate and interest rate differentials between Korea and the United States, as well as the so-called 'Korea discount.' To address these, we need to strengthen domestic industrial competitiveness and improve capital market systems to enhance investment incentives over the medium to long term. However, since October last year, the won has depreciated more than the dollar, largely because the continued increase in residents' overseas securities investments has created 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 the impact of the National Pension Service's overseas investments on the overall national economy should be re-examined alongside the need to protect the fund's long-term returns. While economic agents make investment decisions based on rational expectations and judgments within their given environment, it is now time to comprehensively review how the persistent expansion of residents' overseas investments affects Korea's economic growth and the development of the domestic capital market on a macro level. He warned, "If the current situation persists, we could face a dilemma in which, even when tensions in the foreign exchange market are high, the National Pension Service continues to purchase dollars according to a predetermined plan, while the foreign exchange authorities must sell dollars to manage the exchange rate." He added, "Even if the exchange rate rises and the National Pension Service's won-denominated book returns improve, this cannot be interpreted as a long-term increase in the value of people's retirement assets."

Against this backdrop, the Ministry of Health and Welfare recently established a task force for flexible strategic hedging, and government ministries, the National Pension Service, and the Bank of Korea have agreed to collaborate on creating a 'new framework' for the National Pension Service's overseas investments. Governor Lee called this "significant progress" and expressed hope that improvements would be made soon.

Regarding concerns that annual investments of 20 billion dollars in the United States could weaken the won, he clarified, "20 billion dollars represents the maximum amount," and reiterated that, "as specified in the memorandum of understanding (MOU) 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." This means that 20 billion dollars will not be mechanically sent abroad each year as investment funds. He emphasized, "In this process, the Bank of Korea will not agree to any decisions that would undermine foreign exchange market stability, working together with the government," adding, "This principle will be strictly upheld."

He predicted that domestic inflation will remain relatively stable compared to major economies, with the inflation rate expected to match last year's 2.1%, given that demand-side pressures are not high. However, he cautioned that if the high exchange rate persists, inflationary pressures could rise again. Addressing the increased burden on ordinary citizens due to higher living costs, he said, "It is not enough to stabilize the inflation rate through monetary policy alone. For items with internationally high price levels, we must also pursue various structural reforms, such as improving distribution systems and expanding import liberalization, to bring down price levels."

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

Need for More Sophisticated Monetary Policy Operations: "Timely Communication of Policy Direction Is a Key Central Bank Responsibility"

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

Governor Lee said, "It is a key responsibility of the central bank to communicate the direction of monetary policy in a timely manner when policy conditions change," adding, "With this in mind, we will further refine our policy communications to enhance credibility, including reviewing how we operate the Monetary Policy Board members' 'conditional base rate outlook for the next three months.'" The Bank of Korea also plans to restructure the financial intermediary support loan system to reduce its quasi-fiscal role and instead use it as a supplementary tool for interest rate policy. In particular, the Bank will strengthen targeted and temporary support 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 will strengthen its role as a think tank for the Korean economy. Governor Lee noted, "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 steadily declining, and this is closely related to monetary policy. He emphasized, "Going forward, it is important not only to highlight problems, but also to demonstrate expertise and competitiveness by proposing practical solutions for structural adjustment, as we did last year with reports on the won stablecoin, improvements to autonomous taxi decision-making systems, and continued employment for the elderly."

To respond to structural changes in digital finance, the Bank of Korea will conduct the second round of real transactions for 'Project Hangang' this year. Through this initiative, the Bank plans to support government efforts to improve treasury fund management using blockchain technology. The 'Bank of Korea AI language model' will also be launched at the end of this month. The network integration project is scheduled for completion by March.