Rhee Chang-yong, governor of the Bank of Korea, said on the 17th that with the won-dollar exchange rate topping 1,480 won during intraday trading, "it can be called a crisis," adding, "I am very worried." However, Rhee said, "I do not agree that (the current exchange rate level) is a financial crisis in the traditional sense."
Rhee stated accordingly at an afternoon press briefing at the Bank of Korea (BOK) headquarters to check the status of the "price stability target operation," when asked whether the won-dollar exchange rate in the 1,480-won range is at a crisis level. Rhee said, "I am also concerned about the impact of the current exchange rate level on prices." A weak won pushes up import prices and becomes a factor that raises overall living costs.
Rhee also said a weak won could widen economic polarization. Rhee said, "Recently, the semiconductor and shipbuilding sectors are benefiting from strong exports, but importers and self-employed people are having a hard time (as prices rise)," adding, "The rise in the exchange rate can deepen this K-shaped growth (a phenomenon in which the pace of economic growth differs by sector, intensifying polarization) and create an environment that makes social cohesion difficult."
However, Rhee said the current weak won does not mean a situation where a financial crisis like in 1997 or 2008 will occur. Rhee said, "Korea is a net creditor nation (a country with more external assets than external liabilities), so because it has substantial overseas assets, there are cases where a currency depreciation yields gains."
Rhee also explained the background to the recent formation by the Bank of Korea of a "four-party exchange rate consultative body" with the Ministry of Economy and Finance, the Ministry of Health and Welfare, and the National Pension Service. Rhee said, "Recently, the exchange rate has unnecessarily risen due to supply and demand factors in our foreign exchange market, so there are areas that can be (managed) through coordination among government ministries." Rhee added, "Of course, there are structural factors such as differences in economic growth rates and interest rates between Korea and the United States, and the Korea discount, but since these take time to resolve, there is a need to adjust supply and demand factors in the short term."
Rhee said that "expectations that the exchange rate will keep rising" are also influencing the upward trend. Rhee said, "Since December, there has been a view asking why the exchange rate is rising when domestic investors' overseas investment has fallen a lot." Rhee added, "Rather than trading volume affecting the exchange rate, it appears that as the weak-won trend has continued, an expectation level for a (higher) exchange rate has formed."
Rhee also said, "Compared with past Decembers, the drop in overseas investment this December is not large," adding, "The amount that domestic investors take out is not small." Stock investors tend to sell a lot of overseas shares in December to receive the capital gains tax credit for overseas stock investments, which is capped at 2.5 million won per year. As a result, overseas investment tends to decrease every December, but the decline this month is smaller than in previous years.