Delaying structural reform will not ease Korea's high exchange rate

Without a fundamental shift in the economy’s structure, currency volatility and inflationary pressure will only intensify. Policymakers should acknowledge this reality when designing countermeasures.

Shin Seong‑ho

The author is a former CEO of IBK Investment & Securities and a member of the Reset Korea Economic Committee.

Since early July last year, the won has weakened despite a broadly softer dollar. The decline accelerated sharply from mid-September 2025, placing a heavy burden on the Korean economy. International oil prices fell, but gasoline prices rose. Import prices in November 2025 were down 2.3 percent on year in dollar terms but up 2.2 percent in won terms. Households were already under strain, with real income growth at zero in the second quarter, and the additional inflation caused by won depreciation further eroded purchasing power.

The photo shows a currency exchange office in Myeongdong, central Seoul, on Dec. 28, 2025. [YONHAP]

Toward the end of 2025, the pace of the won’s decline moderated. Even so, the Bank of Korea’s view — that heavy overseas equity investments by “seohak ants,” or Korean retail investors buying foreign stocks, were the main driver of the currency’s weakness — has sparked debate. The data raise questions about that interpretation. From January to June last year, Korea’s average monthly purchases of overseas securities, including equities and debt instruments, totaled $11.69 billion, and foreign investment in Korean securities averaged $3.74 billion a month. The net outflow therefore stood at about $7.95 billion per month.

However, during the period of exchange rate instability from July to October 2025, the average monthly net outflow related to overseas securities fell to $6.19 billion. While exchange rate pressure may have played a role, it is notable that during the very period when overseas retail investment was blamed, such investment actually dropped by more than 20 percent.

Exchange rates are closely linked to growth and interest rates. Countries with higher growth rates tend to have stronger currencies than those with weaker ones. Under normal conditions, currencies of countries with higher interest rates also tend to be stronger. In practice, economies with higher growth often maintain higher interest rates than their slower growing peers.

Growth, in short, is a decisive factor for exchange rates. The International Monetary Fund (IMF) estimates Korea’s growth rate in 2025 at 0.9 percent, placing the country in the bottom 10.5 percent among the IMF’s 201 worldwide growth forecasts. This reflects the cumulative outcome of successive administrations delaying restructuring, advanced industry development and labor reform while relying on short-term populist measures to manage the economy. Korea’s policy rate has also remained lower than that of the United States for most of the period since 2015, except briefly in early 2020. As of the end of last year, only a handful of economies, including that of Taiwan, Japan and the European Union, had central bank rates lower than Korea’s.

With such economic fragility, it is difficult for the won to hold its ground. Since 2017, the won has depreciated at a faster pace relative to the dollar index. When the dollar strengthened by one unit, the won weakened by more than one. As a result, cumulative foreign purchases of Korean equities in dollar terms fell from a peak of $117.3 billion in January 2018 to $65 billion by July 2022. Although the figure recovered to $88.6 billion as of October 2025, global markets increasingly appear to treat Korean stocks as short-term trading instruments. The range of stocks attracting foreign buying has also narrowed.

In such circumstances, even shocks unrelated to dollar supply and demand can trigger sharp currency moves. That was the case in the second half of last year. In October 2025, amid already weak growth, the National Assembly passed the so-called Yellow Envelope Bill, which businesses argue further constrains corporate activity. This likely weighed on the exchange rate. External factors compounded the pressure. When Japanese Prime Minister Sanae Takaichi took office that same October and signaled a continuation of Abenomics, the yen depreciated rapidly. Because the won has often moved in tandem with the yen, it also came under renewed pressure. Additionally, Washington’s demand for $350 billion in investment from Korea unsettled the foreign exchange market.

The photo shows a fuel price board at a gas station in Seoul on Dec. 2, 2025. [YONHAP]

The roots of today’s exchange rate instability have accumulated across multiple administrations. Once additional shocks hit, the currency swung sharply. Without a fundamental shift in the economy’s structure, currency volatility and inflationary pressure will only intensify. Policymakers should acknowledge this reality when designing countermeasures and speak candidly to the public about the costs that such measures entail.

There are overseas examples worth studying. Former German Chancellor Gerhard Schröder's reforms, French President Emmanuel Macron's early-term policies that pushed unemployment to its lowest level since 1980 and Brazilian President Luiz Inácio Lula da Silva's economic revitalization achieved during his first term all centered on labor reform and support for businesses. Taiwan, where changes in government do not translate into abrupt shifts that unsettle companies, also offers a useful model.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.