The Bank of Korea (BOK) will exclude equity and bond exchange-traded funds (ETFs) and other investment trust securities from the tally of broad money (M2). If the M2 growth rate is tallied under the current 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, fueling a rise in the exchange rate and home prices.
The BOK said on the 16th that it will change the way it tallies M2 in line with a recommendation from the International Monetary Fund (IMF). Korea's M2 refers to the currency supply that combines cash, cash equivalents, and short-term financial instruments, and it has so far 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 BOK began overhauling currency indicators in 2019 and changed the M2 tally method for the first time in six years. The new method will be officially applied starting with the release of currency and liquidity data in Nov. The change in the M2 tally method is the first in 23 years since 2002.
Under the new method, the M2 growth rate drops sharply from the previous measure. Under the current tally, M2 as of Oct. was 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 BOK's change to the M2 tally method comes as rising liquidity is being cited as a cause of a stronger exchange rate and higher home prices. There is criticism that increased government fiscal spending and the BOK's rate cuts have combined to release too much money into the market, weakening the won and pushing up real estate prices. Some also say the BOK is changing how it tallies M2 to dilute such criticism.