Historically weak won drives critics to claim years of policy complacency, excessive gov't spending

Korea’s won has crossed a level rarely seen outside periods of financial crisis, trading above 1,500 won per dollar for almost a month. While the government attributes the currency’s weakness to speculative trading and mass foreign capital outflows in the stock market, critics argue that years of policy complacency helped set the stage for the won’s sharp decline.

Beyond expansionary fiscal policies and what critics describe as a delayed start to the interest-rate hiking cycle, which is yet to start, authorities also face criticism for their passive response to the won’s prolonged depreciation, which is standing out as one of the weakest performers among Asian currencies against the dollar this year alongside Indonesia’s rupiah. After closing above the threshold on May 15, it has continued to stay at the level, trading at 1,519.8 at 3:30 p.m. on Friday — a slight appreciation after it touched 1,561.5 during after-hours trading on June 5.

"Foreign investors' selling has put pressure on the won, but the current exchange-rate level is also the result of policy decisions made over the past several years," said Kim Sang-bong, a professor of economics at Hansung University, citing the Bank of Korea’s (BOK’s) monetary easing and the government’s expansionary fiscal stance.

Policy costs pressure won

Since the inauguration in June last year, the Lee Jae Myung administration has pursued an expansionary fiscal stance aimed at boosting economic growth.

The government has proposed a 2026 budget totaling 728 trillion won,  a record high and up 8.1 percent from the previous year’s original budget. That is a contrast from the previous Yoon Suk Yeol administration, which stressed fiscal consolidation following a series of tax cuts. 

Less than a year into the office, Lee pushed through two supplementary budgets, starting with a 31.6 trillion won package approved in July just weeks after his inauguration to support growth. That was followed in April by a 26.2 trillion won package aimed at cushioning the economy from the fallout of the war in the Middle East.

“The April supplementary budget alone amounts to roughly 1 percent of Korea’s GDP last year,” said Kim. The impact of expansionary fiscal policy on the exchange rate tends to fade over time as other countries inject liquidity into their economies, but it could put short-term pressure on the foreign-exchange market, he explained.

The International Monetary Fund (IMF) has already warned against Korea’s rising debt burden. In its April Fiscal Monitor report, the organization projected that Korea’s general government gross debt ratio could see “significant increases” to 63.1 percent of GDP by 2031 from this year’s estimated 54.4 percent, highlighting the rapid pace of debt growth. The IMF said it reflected Korea’s annual budgets, supplementary spending packages, and proposed fiscal measures.

Some blame the BOK’s delayed rate hikes. After cutting the base interest rate from 3.5 percent to 3.25 percent in October 2024, the easing cycle extended through May 2025 when the rate was lowered to 2.50 percent. The rate has remained unchanged since, even as the inflation accelerated following the Middle East conflict and the won touched the historic 1,500-threshold.

“The BOK should have seriously started considering rate hikes when the won weakened to the high 1,400 won range and foreign investors began aggressively selling Korean equities,” said Kim Yong-jin, business professor at Sogang University.

“The Kospi had repeatedly broken through key milestones to reach record highs, and under such conditions, a weaker won can compel foreign investors to reduce equity holdings to maintain portfolio balance and manage currency-related risks,” he added. “With inflationary pressures persisting, a rate-hike cycle now appears inevitable, as even the Federal Reserve is finding it difficult to avoid a more hawkish stance amid steep inflation.”

Critics argue that the won’s weakness cannot be explained by interest-rate policy alone. Korea’s M2 money supply, a key gauge of money supply, jumped 37 percent from 2020 to 2025 based on the new standard adopted in January, according to the BOK data. During the same period, the United States saw its broad money increase 29 percent, showed the IMF data.  

“Korea’s faster monetary expansion relative to the United States over the past several years has been another structural driver of the won’s depreciation, given mid-to-long-term impact monetary policy has on exchange rates,” said Kim from Hansung University.

Misleading signals

Some economists say the government’s handling of the weak won is seen as too complacent and, oftentimes, embracing.

Last month, the presidential chief of staff for policy Kim Yong-beom controversially described Korea’s combination of high interest rates, high inflation and a weak currency – the so-called three highs – as “the cost of success” accompanying the country’s economic advance into a new stage, rather than a sign of crisis.

His argument that the current turbulence should be viewed as “friction from a leap forward” rather than evidence of economic instability drew sharp criticisms, with some economists questioning his interpretation of current economic conditions.

“Such remarks can be translated as a message that the government embraces a weak won and that the current situation is out of their hands,” said Chang Min, a senior research fellow at the Korea Institute of Finance.

As the won has depreciated, financial authorities have stepped in multiple times but focused on volatility rather than the foreign exchange rate’s level. Most recently, the Ministry of Finance and Economy and the BOK made a joint verbal intervention on June 8, saying they “will not tolerate excessive volatility or one-sided moves that deviate excessively from economic fundamentals” while attributing the won’s weakness to speculative trading in the offshore non-deliverable forward market.

It followed BOK Gov. Shin Hyun-song’s remarks last month, when he strongly said that “herdlike movements in the currency will not be tolerated” in the first post-monetary policy board meeting press conference held on May 28.

To stabilize the currency, the finance ministry said the BOK and the Financial Supervisory Service are set to launch a joint inspection of major foreign-exchange banks to detect any potential unfair trading practices, including exchange-rate manipulation.

“While foreign exchange volatility is important, the level of the exchange rate is also crucial,” Chang added. “A weak won reduces purchasing power, curbs consumption, and puts pressure on corporations. Messages suggesting that the current level of the won is not a major concern and that volatility matters more could create the impression that the government is only seeking to maintain the current level.”

Others, however, say policymakers would be risking sending the wrong signal if they placed too much emphasis on the won’s weak level.

“Under Korea’s floating exchange-rate system, the government cannot set a specific target for the currency, so in periods of the won’s weakness, its messages tend to focus on volatility,” said Huh In, an economics professor at the Catholic University of Korea.

Concerns may instead focus on delayed interest rate hikes, Huh added, though he noted that it may have been difficult for the BOK to begin tightening monetary policy earlier, before inflationary pressures intensified, as such a move could have conflicted with the government’s expansionary fiscal stance.

BY JIN MIN-JI [[email protected]]