BOK: 'Overseas Investment Demand Since 2020 Has Driven Up Exchange Rate... Will Stabilize Going Forward'

Hankyoreh, a prominent South Korean newspaper known for its progressive stance, sheds light on the Bank of Korea's analysis of the won's recent depreciation. The central bank's report challenges conventional economic wisdom by identifying increased demand for overseas investments from South Koreans, often referred to as 'Seohak-ae' (investors in overseas stocks), as the primary driver behind the rising exchange rate since 2020.

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Currently, there is a tendency to buy foreign stocks even if they are expensive, with the idea of increasing their proportion in the portfolio. If the proportion has sufficiently increased, there may be adjustments such as selling when expensive.

Traditionally, a robust current account surplus, driven by strong exports particularly in the semiconductor sector, should lead to a stronger won. However, the Bank of Korea points out a structural shift: since 2014, South Korea has become a net external asset holder. Crucially, the nature of these external assets has evolved from foreign exchange reserves to significant private investments in foreign securities, primarily stocks. This shift means that as South Koreans invest more abroad, capital flows out of the country, putting downward pressure on the won, even amidst strong export performance.

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Compared to other countries, the exchange rate moves too sensitively. In places where foreign exchange market transactions are large, the shock is mitigated.

The report, titled 'Impact of Structural Changes in South Korea's External Sector on the Exchange Rate,' explains that this phenomenon, termed 'financial shock' rather than the traditional 'commodity shock,' has led to a situation where both the current account surplus and the exchange rate have risen in tandem since 2020. This is largely due to the dramatic increase in South Korean households' holdings of foreign stocks, which surged significantly around 2020.

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Currently, the central axis has shifted to private portfolio investment.

While acknowledging that recent geopolitical tensions like the US-Iran conflict contribute to short-term volatility through risk aversion and reduced foreign investment in South Korea, the Bank of Korea remains cautiously optimistic about the won's future. The analysis suggests that as South Koreans' overseas investment portfolios reach desired levels, the current trend of buying foreign assets regardless of price may subside, leading to potential adjustments and stabilization of the exchange rate. Hankyoreh highlights this nuanced perspective, emphasizing that the domestic investor's behavior, rather than solely external factors, plays a critical role in the won's valuation, a point often missed in international financial reporting.

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The household's ownership of overseas stocks has dramatically increased since around 2020. Side effects like this (high exchange rate) occur in the process of increasing ownership.