The Bank of Korea (BOK) will exclude investment trust securities such as stock and bond exchange-traded funds (ETFs) from the tally of broad money (M2). If the M2 growth rate is compiled using the previous method, it is in the 8% range, but it falls to the 5% range under the new method. There had been criticism that Korea's M2 growth rate is higher than that of major countries such as the United States, driving up the exchange rate and housing prices.
The Bank of Korea (BOK) said on the 16th that it will change the M2 compilation method in line with a recommendation from the International Monetary Fund (IMF). Korea's M2 refers to the money supply combining cash, cash-like assets, and short-term financial products, and it had included investment trust securities such as ETFs. The IMF, however, recommended excluding investment trust securities from M2 due to their high volatility. The United States, Europe, and Japan have already excluded investment trust securities from M2 even before the IMF recommendation.
Based on the IMF recommendation, the Bank of Korea (BOK) began overhauling monetary indicators in 2019 and changed the M2 compilation method for the first time in six years. The new method will be officially applied starting with the November publication of money and liquidity data. This is the first change to the M2 compilation method in 23 years since 2002.
Under the new method, the M2 growth rate drops significantly from the previous level. Using the previous method, M2 as of Oct. stood at 4,471.6 trillion won, up 8.7% from a year earlier. Investment trust securities account for more than one-third of this growth rate. Excluding investment trust securities, the M2 growth rate as of Oct. falls to 5.4%.
The Bank of Korea (BOK)'s change to the M2 compilation method comes as rising liquidity is being blamed for a weaker currency and higher home prices. Critics say the government's increased fiscal spending and the BOK's rate cuts together have flooded the market with too much money, weakening the won and lifting real estate prices. Some also say the BOK is changing how it compiles M2 to dilute such criticism.