The Bank of Korea (BOK) said on the 19th it will pay 3.50%–3.75% annual interest for six months starting in Jan. next year when financial firms place foreign-currency deposits above the statutory ratio. It is a signal telling financial firms not to invest dollars overseas but to bring them into the domestic market.
The Bank of Korea (BOK) will also temporarily exempt, for six months starting in Jan. next year, the 0.02%–0.2% foreign-exchange soundness levy imposed on financial firms' non-deposit foreign-currency liability. With the levy waived, banks can reduce their dollar funding expense and expand supply.
◇ Banks receive interest when they place foreign-currency deposits above the statutory ratio at the BOK
The Bank of Korea (BOK) said it convened an ad hoc meeting of the the Bank of Korea's monetary policy committee that day and decided on two measures to stabilize the foreign-exchange market: ▲ temporary remuneration on foreign-currency reserve requirements (附利; interest attached) ▲ temporary exemption of the foreign-exchange soundness levy.
It is the first time the Bank of Korea (BOK) has paid interest on financial firms' foreign-currency deposits exceeding the statutory ratio. Financial firms must place with the BOK an amount equivalent to 2%–7% of their foreign-currency deposits. The funds placed this way are called reserve requirements. The BOK controls the money supply through reserve requirements. It also provides a safety device to prepare for the possibility of sudden large-scale deposit withdrawals.
The Bank of Korea (BOK) said, "Financial institutions can operate foreign-currency funds that were mainly managed overseas domestically while earning stable interest revenue relative to risk." It also said, "There is also expected to be an effect of foreign-currency deposits operated overseas by non-financial institutions and individuals flowing into the domestic market."
The foreign-exchange soundness levy was introduced in 2011 to curb banks' excessive expansion of foreign-currency liability. It imposes a levy on foreign currency borrowed directly by financial firms in the market. When the levy is waived, financial firms' dollar funding expense falls. As dollar funding becomes easier than before, the dollars supplied to the market can also increase. The government last temporarily exempted the foreign-exchange soundness levy in the second quarter of 2020 and has brought back the same measure after five and a half years.
◇ Japan raises rates to the highest level in 30 years… won-dollar exchange-rate volatility could increase
The decision came after the Bank of Japan (BOJ) released that it would raise the benchmark interest rate to 0.75% from 0.5% annually. Japan's benchmark rate is at its highest level in 30 years. As a result, concerns are emerging that a large-scale "yen carry trade unwind" could occur, increasing won-dollar exchange-rate volatility.
The "yen carry trade" is a strategy of borrowing yen in Japan, where rates are low, and investing in the U.S. market, where rates are relatively high. If Japanese rates rise, analysis suggests investment funds will move from the United States to Japan.
In this case, U.S. stocks could fall, and Korean stocks could move in the same direction. If that happens, it becomes a factor pushing up the won-dollar exchange rate (a decline in the won's value). At the same time, a rise in the yen's value is also a factor for a rise in the won's value, which often moves in tandem with the yen. That day, the won-dollar exchange rate opened at 1,475.5 won, down 2.8 won from the previous day, and was slightly higher as of 2:40 p.m.