Saturday, October 23, 2010

S. Korea Government Studying `Several' Measures to Control Capital Flows. 또? 아직도 하나 안배웠습니까?

Today, this article appeared on

The reason for these measures would be to control the rise of the Korean Won against the US dollar.  This article has pointed out that the Korean Won has increased by 6.6% over the recent past, which would make Korea the 3rd strongest amongst non-Japan Asian countries. 

Even Bloomberg has it wrong.  Compared to the USD, yes the KRW has appreciated.  However, today the EUR/KRW has increased to 1575 from approximately 1480 two months ago.  In addition, the JPY/KRW exchange rate has increased to 13.9 from a low of 13.35 in the middle of September.  You can read my observation that the elevated JPY/KRW has created for Japan in my post here: 

The problem here is that measures to control the foreign exchange rate of countries of Korea's GDP and capital flows almost always fails.  Take the Japanese example.  Recently, the Yen hasn't weakened at all despite repeated public comments, and foreign exchange intervention by the Bank of Japan.  During the financial crisis of 2008, the BOK tried to actually defend its currency but instead, the Won depreciated by approximately 20% from the levels it tried to defend.  Why is that?  The global capital flows were larger than the amount of intervention.  Quite simple, really.

This time, Korea is trying to weaken its currency, in order to keep its competitive advantage in the international marketplace for exports.  World-class Korean products are relatively cheap compared to European and Japanese competition already.    In addition, Korean citizens will experience a much greater risk of inflation in the near-term.  Normally, interest rates need to increased in order to quell inflation.  Doing so, when the rest of the world (except Australia) is keeping interest rates steady (and the U.S. is effectively lowering rates), will lead to increased demand for the Won. 

Longer-term, the proposals considered by the BOK will weaken Korea's position in the global economy.  Unilateral attempts to affect currency levels are not only almost always unsuccessful, but the countries that attempt to do so are perceived to be weak.  The Swiss National Bank and BOJ are the two most recent exaples.  No one believes in what these institutions are doing any longer.  The result of the proposals considered by the BOK would inevitably be that when Korea wants to attract additional capital, it will not be able to spur demand for the KRW quickly enough.

In other words, unnatural measures will lead to unnatural circumstances  The victims? Korean citizens.


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