FX authorities, NPS consultative body not a temporary mechanism to ensure won's stability, Finance Ministry says

The new consultative body formed last week between foreign exchange (FX) authorities and the National Pension Service (NPS) is not a short-term measure to stabilize the won, said the Ministry of Economy and Finance on Wednesday.

Finance Minister Koo Yun-cheol speaks on Korea’s foreign exchange market at a press conference held at the government complex in Sejong on Nov. 26. [MINISTRY OF ECONOMY AND FINANCE]

The foreign exchange (FX) authorities did not bring in the National Pension Service (NPS) as a temporary means to stem the won’s weakness, but as a fundamental measure to ensure stable pension payments without undermining profitability, the Ministry of Economy and Finance said Wednesday.

“The NPS plays the largest role in the foreign exchange market as a single entity,” said Finance Minister Koo Yun-cheol during a press conference held at the government complex in Sejong. “Because the fund’s returns are evaluated in won, stable conditions in the FX market significantly affect its profitability. If the share of overseas investments increases or decreases sharply in the short term, there is a risk of amplifying FX market volatility.”

To tame the weakening of the won, the FX authorities formed a new consultative body with the world’s third-largest pension fund and held its first meeting on Monday under the title, “Establishing a New Framework for the NPS.”

The pension service's overseas stocks and bonds totaled 580.7 trillion won ($396 billion) as of the end of August compared to the $428.8 billion in total foreign reserves Korea held in October.

The body was formed to assess the impact of expanding NPS investments overseas on the FX market and to strengthen coordination among the Ministry of Economy and Finance, the Ministry of Health and Welfare, the Bank of Korea and the NPS.

Koo added that any decisions regarding adjustments to the NPS’s overseas equity allocation or the adoption of a more active FX hedging strategy will be made independently by the fund's management committee.

Korea's involvement in the FX market has been met with scrutiny by the United States. In June, the U.S. Treasury Department opted to keep Korea on its currency monitoring list, citing the $65 billion swap line between the NPS and the Bank of Korea signed in December of last year. Expanded from the previous $50 billion, the agreement has been extended to the end of 2025.

The minister cited uncertainty over the U.S. Federal Reserve's rate cuts, growing overseas stock investments by domestic retail investors and the reduced conversion of export companies’ foreign earnings into won as some of the key factors behind the currency’s depreciation.

“It’s true that structural foreign exchange pressures are at work, making the won more sensitive than other currencies,” Koo added. “The government is closely monitoring speculative transactions and one-sided movement, and we will respond in accordance with the principle of taking firm action if volatility becomes excessively amplified.”

But the ministry said it is not currently considering measures to encourage exporters to convert their foreign currency earnings into won or to provide tax incentives for investors trading overseas equities.

To tame the market, the authorities also held a closed-door meeting with FX specialists from nine brokerage firms last week to discuss ways to disperse the concentrated demand for foreign-currency settlements generated by retail investors trading overseas stocks. The authorities see that demand, which typically peaks with market opening the following day, as a cause behind the sharp volatility in the FX rate during the early market session.

The press conference was scheduled just a day prior as the won weakened in recent weeks, hitting 1,479.4 to the dollar on Nov. 24. It strengthened to be quoted at 1,465.6 on Wednesday when the market closed at 3:30 p.m.

BY JIN MIN-JI [jin.minji@joongang.co.kr]