We have talked frequently that we are investing in a time when Central Banks rule financial markets. Korea is no exception. The chart below shows the Bank of Korea policy rate going back to the financial crisis since 2008. Since the Asian Financial crisis of 1997, the Bank of Korea has explicitly targeted inflation/price stability as its mandate. However, it also mentions that price stability requires financial stability, which gives the Bank of Korea a broad mandate to look at everything. In Korea’s case, this means the currency exchange rate.
Over 50 percent of Korea’s GDP is exports. This creates a huge sensitivity when there are dramatic currency movements. In the eyes of many in South Korea, the weakening Yen has resulted in Japan and Japanese companies taking market share from Korea and Korean companies. Those I spoke to in Korea are worried about relative exchange rates, and they expect and hope that the Bank of Korea will continue with its easy monetary policy. The purpose repeatedly voiced for the policy is to weaken the Korean Won. Here are a sample of headlines that tell the story:
- May 3rd, Bloomberg: S. Korea Fires Warning Shot to Japan: We’re Watching Yen-Won
- May 12th, Bloomberg: Korea's Export Engine Slips into Reverse as Japan Steps on the Gas
- May 25th, Bloomberg: Korea Won Falls Most in 11 Weeks as BOK’s Lee Flags Growth Risk
- May 26th The Korea Times: BOK may cut key rate in June
- May 27th, Bloomberg: Korea Exporters Turn Screws on BOK to Sell Won as Yen Sinks
- May 29th, The Korea Times: Weak exports adding pressure on BOK
- June 3rd, The Financial Times: South Korea likely to take up arms in currency war
On my visit to the Bank of Korea, I visited the Bank of Korea Money Museum. It was excellent. I find museums and gift shops run by central banks to be very revealing. Three years ago, it was my visit to the German BundesBank money museum in Frankfurt that gave me the best window into understanding Germany’s monetary policy. The same was true in London at the Bank of England, and now in Korea. I took some screen shots from the Bank of Korea museum:
I thought it was interesting to read the first line on the exhibit “The Bank of Korea on the Global Stage.” It starts, “With central bank’s role growing worldwide since the global financial crisis…”
Notice the emphasis on a weak currency’s benefits to exporters and the on the value of free trade.
The mindset of the Korean policy makers is that of an exporter, and we expect the Bank of Korea to continue to worry about the currency.