Rhee Chang-yong, governor of the Bank of Korea, said it is time to comprehensively review how residents' continued expansion of overseas investment is affecting Korea's economic growth and the development of the domestic capital market at the macro level.
Rhee said in a New Year's message on Jan. 2 that while economic agents' investment decisions are based on their rational expectations and judgments within the given environment, serious reflection is needed on these issues, and stated accordingly.
He also offered an assessment of the won-dollar exchange rate level. Rhee said that while it is hard to conclude what the appropriate level of the exchange rate is, the recent rate in the upper-1,400-won range appears to be far out of line with Korea's economic fundamentals.
He added that the reason the won's depreciation has been relatively larger than the dollar's movement since Oct. last year is in part because residents' steadily increasing overseas securities investment has created a supply-demand imbalance in the foreign exchange market, putting significant short-term upward pressure on the exchange rate.
Rhee said that if the current situation—where a pan-government system to coordinate macro effects across ministries is not in place—continues, we could see repeated dilemmas in which, even amid heightened tension in the foreign exchange market, the National Pension Service must mechanically buy dollars according to a set plan while the foreign exchange authorities must sell dollars to manage the exchange rate.
He also said it is necessary to reexamine the impact that the National Pension Service's overseas investments, which are exerting increasing influence in the foreign exchange market, are having on the national economy as a whole, while also protecting the fund's long-term returns.
He also made clear the Bank of Korea's principles on exchange rate management following the Korea-U.S. tariff negotiations. Rhee said he is well aware of concerns that annual investment funds of $20 billion bound for the United States will weaken the won, adding that $20 billion represents the upper limit, and, as specified in the memorandum of understanding (MOU) between the two countries, the actual investment size will be determined within a range that does not undermine stability in the foreign exchange market.
He added that the Bank of Korea, together with the government, will not agree to any decision that harms stability in the foreign exchange market.
He also set out the direction for currency policy. Rhee said that as uncertainty in the policy environment grows and conflicts among policy variables intensify, future monetary policy will be conducted with precision while closely examining a range of economic indicators.