The Bank of Korea (BOK) on the 16th changed how it compiles the "broad money (M2)" and revised down the October M2 growth rate to 5.4% from 8.7%. It also released a separate note saying that "the claim in some quarters that the recent rise in the M2 growth rate is the key cause of the higher exchange rate is an overinterpretation," and held a media briefing.
In response, inside and outside the Bank of Korea (BOK), some said the central bank is taking an unusually tough stance after criticism emerged that the won weakened because it failed to manage liquidity.
◇ Overseas stock retail investors say "the exchange rate went up because M2 increased, so why blame only us"
The claim that a surge in M2 caused the exchange rate to rise is being raised mainly by "overseas stock retail investors" who invest in U.S. stocks. It is a counterargument to the government and the Bank of Korea (BOK) saying recently that the main cause of the high exchange rate is "the increase in our people's overseas securities investment."
As of September, Korea's M2 growth rate was 8.5%, far higher than the United States (4.5%), Europe (2.5%) and Japan (1.6%). If too much won circulates in the market, the won's value falls and the won-dollar exchange rate rises.
A person surnamed Kim, an office worker in his 30s who invests in U.S. stocks, said, "Isn't the Bank of Korea (BOK) blaming only 'overseas stock retail investors' when the exchange rate rose because it failed to properly manage M2?" adding, "It feels like the Central Bank is shifting a problem it caused onto individuals."
◇ Bank of Korea (BOK) says "the cumulative M2 growth rate is actually 6.1 percentage points lower than the U.S."
In response, the Bank of Korea (BOK) issued a separate six-page A4 note titled "Understanding the recent liquidity situation." The conclusion was that "the concern in some quarters that liquidity has been excessively ample recently and that this is causing the relative weakness of the won is assessed as somewhat of an overinterpretation."
Along with this, the Bank of Korea (BOK) newly adopted a method of excluding revenue securities such as ETFs from the M2 tally. The October M2 growth rate is 8.7% under the standard method, but drops sharply to 5.4% when revenue securities are excluded.
The Bank of Korea (BOK) said the recent increase in liquidity is not large compared with past base rate cuts. During the four rate cuts since Oct. last year, the M2 growth rate was tallied at 8.7%. This is larger than July 2012 (5.9%) but smaller than Aug. 2014 (10.5%) and July 2019 (10.8%).
The Bank of Korea (BOK) also said that Korea's cumulative M2 growth rate from March 2020, before COVID-19, to recently shows little difference from major countries. During this period, Korea's cumulative M2 growth rate (49.8%) was actually lower than that of the United States (43.7%).
◇ "Even with the new standard applied, Korea's M2 growth rate is higher than the U.S., Europe and Japan"
However, some point out that even if the Bank of Korea (BOK) applies the standard that excludes revenue securities such as ETFs from the M2 tally, Korea's M2 growth rate is higher than that of the United States, Europe and Japan. Korea's October M2 growth rate was 5.4% year over year. It was higher by at least 1.2 percentage points and as much as 3.9 percentage points than Japan (1.5%), Europe (2.4%) and the United States (4.2%).
In this regard, the Bank of Korea (BOK) said in the "Understanding the recent liquidity situation" note that "in the case of the exchange rate as well, foreign exchange supply-demand factors such as the expansion of residents' overseas securities investment and the strengthening propensity of exporters to hold foreign currency appear to be playing a bigger role than the liquidity situation." It added, "It is judged that the liquidity channel is not having a significant effect on the recent rise in the exchange rate." The point is that the increase in M2 is not a direct cause of the high exchange rate.