Seoul: A weak Korean won is drawing attention to deeper structural issues within South Korea's economy rather than a shortage of short-term policy solutions. The won has been fluctuating around 1,480 per US dollar, nearing the critical threshold of 1,500, despite a current account surplus of approximately $90 billion through November.
According to Yonhap News Agency, South Korea's government is actively taking measures to address this situation. Technical deregulation has been implemented to facilitate dollar inflows, with foreign exchange liquidity stress tests suspended until June 2026. Additionally, the forward position limits for foreign banks have been increased to 200 percent of capital, and exporters are now permitted to use foreign currency loans for operating funds. These efforts aim to modernize Korea's foreign exchange strategies, which have become outdated.
However, concerns arise as deregulation is coupled with pressure on large conglomerates to avoid dollar hoarding. Financial regulators have also issued warnings to brokerages targeting retail investors with overseas investment marketing. This approach sends a mixed message, especially as firms prepare for significant long-term investments in the US, estimated at $350 billion.
The global economic environment further complicates the situation. Recently, the Bank of Japan raised its policy rate to 0.75 percent, the highest in three decades, posing potential risks of capital reversals due to the unwinding of yen-carry trades, estimated at up to $4 trillion globally. Although a stronger yen typically benefits South Korea, the current climate favors a broader shift to the US dollar, leaving the won vulnerable.
The won's weakness cannot be solely attributed to external factors. Despite a trade surplus, South Korea is experiencing substantial capital outflows, with approximately $150 billion leaving through direct and portfolio investment. This indicates a credibility issue rather than a liquidity problem, as domestic investors seek more stable returns and clearer governance in foreign markets, particularly the US.
The current strategy of financial isolationism, such as discouraging dollar holdings and restricting global investments, may temporarily slow outflows but fails to address the root cause. To achieve currency stability, South Korea must focus on making itself an attractive destination for global capital. Structural reforms, corporate governance improvements, and restoring fiscal discipline could enhance confidence in the won more effectively than administrative measures.
The challenges faced by the Korean won reflect not concerns about South Korea's solvency but doubts about its economic trajectory. Without addressing these underlying issues, administrative interventions are unlikely to stabilize the currency.