Is $400 billion enough? Korea wrestles with foreign reserve plans amid weaker won, U.S. investment.

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Is $400 billion enough? Korea wrestles with foreign reserve plans amid weaker won, U.S. investment.

Published: 26 Dec. 2025, 16:33 Updated: 26 Dec. 2025, 18:57

Audio report: written by reporters, read by AI

An electronic board shows exchange rates at a currency exchange office in Myeong-dong, Seoul, on Dec. 25. [NEWS1]

Korea's $400 billion foreign reserve has come under scrutiny as the country strives to weather the headwinds of an ongoing drop in the won's value against the dollar, as well as the soon-to-begin $20 billion annual investment requirement for the United States.

Foreign exchange reserves refer to foreign currency-denominated assets held to offset balance-of-payments imbalances or stabilize the foreign exchange market. In short, they are the nation’s “dollar stamina” — emergency funds to be tapped into during a currency crisis. After the dollar shortage of the 1997 financial crisis, Korea came to view $400 billion in foreign-exchange reserves as a psychological “red line” to stay above.

Korea’s foreign exchange reserves stood at nearly $430.7 billion as of the end of November, according to the Bank of Korea (BOK) on Thursday. That figure is a rise of $1.84 billion from a month earlier, driven by higher investment returns and an increase in foreign currency deposits by financial institutions.

By size, Korea’s reserves rank ninth in the world. After first surpassing $400 billion in June 2018, the country's reserves climbed to around $460 billion during the Covid-19 pandemic in 2021, before declining and then rebounding to hover in the low $400 billion range in recent months.

The latest round of debate over the adequacy of reserves was sparked by the government’s active market intervention after the won skyrocketed to around 1,480 per dollar. Despite the central bank's own set of efforts to curb currency volatility in what's called a smoothing operation, concerns emerge that foreign reserves could still decline for the time being.

The won-dollar exchange dropped sharply to 1,449.8 won against the dollar — down 33.8 won from Tuesday's close of 1,483.6 won — after the government signaled its strong intent for intervention on Wednesday.

Adding to the pressure is the fact that Korea has promised to directly invest $20 billion every year in the United States per its recent tariff negotiations. The government maintains that such investments will be financed within the scope of interest and dividend income from the reserves, meaning that the principal will not be affected. However, they could still add downward pressure.

[BANK OF KOREA]

“If reserves fall below $400 billion, it creates psychological anxiety [for the market],” said Kim Jung-sik, a professor emeritus at Yonsei University. “It is not easy to defend the exchange rate by using reserves at this point.”

As a result, some argue that $400 billion in “ammunition” may not be sufficient. Based on lessons from past currency crises, experts contend that reserves should be large enough to cover at least one year of imports of goods and services. Using last year’s annual import figure of about $632 billion, Korea’s current reserves of $430.6 billion amount to roughly just eight months’ worth.

By contrast, Japan — which plans $550 billion of investment in the United States — holds reserves of $1.23 trillion, equivalent to about 19 months of imports based on its 2023 import total of $742.67 billion.

Korea also ranks on the lower end among Asian countries when measured by reserves compared to GDP. Korea's foreign exchange reserve came in at $415.6 billion at the end of 2024, or about 22.2 percent of its $1.87 trillion GDP. Japan, on the other hand, held foreign reserves amounting to 30.6 percent of its nominal GDP.

Taiwan presents an even starker contrast. Its nominal GDP of $797 billion is less than half of Korea’s, yet its foreign exchange reserves stand at $576.7 billion — a hefty 73.7 percent of GDP. Taiwan’s reserves surpassed $600 billion in September.

Foreign reserves increased in November for the first time in four months due to an increase in the converted value of non-dollar assets. Korea's foreign reserves stood at $430.7 billion at the end of November, up $1.84 billion from the previous month, according to the Bank of Korea. [YONHAP]

“Direct investment in the United States totaling $200 billion over the next decade, along with $150 billion in support related to the Make America Shipbuilding Great Again [Masga] shipbuilding cooperation, could heighten dollar shortages and exchange-rate instability in the short term,” said Kim Dae-jong, a professor of business administration at Sejong University.

Kim argued that reserves should be expanded to at least double the current level, in line with international organizations’ recommendations. Based on indicators proposed by the International Monetary Fund (IMF) and the Bank for International Settlements, he said Korea should hold between $520 billion and $900 billion in reserves.

There are, however, strong counterarguments. The IMF has previously assessed that Korea’s reserves “provide sufficient FX liquidity buffers under a wide range of plausible shocks” in a press release in November. “Foreign reserves cover about 2.6 times of short-term external debt, providing a substantial buffer against potential shocks,” said The Asean+3 Macroeconomic Research Office said in a press release on Dec. 19.

“The IMF’s reserve adequacy metrics are formulas mainly centered on developing countries that maintain fixed exchange rate regimes,” BOK Gov. Rhee Chang-yong reiterated during a National Assembly audit in October. “The criteria no longer apply to Korea, which operates under a fully floating exchange rate system.”

On U.S. investment, Rhee also drew a line, saying it would be carried out “within a range that does not cause instability in the Korean foreign exchange market,” as stipulated in memorandums of understanding.

The won-dollar exchange rate falls sharply on Dec. 24 after the government rolls out currency measures and authorities deliver verbal intervention, with a display board at a Hana Bank branch in central Seoul, showing the rate at 1,451 won. [NEWS1]

The BOK recently noted as well that while a sharp increase in net external assets — external financial assets minus liabilities — to over $1 trillion has added pressure on the won, Korea’s external safety net and overall external soundness have been strengthened.

In fact, experts caution that it's not a simple “the more the merrier” situation for foreign exchange reserves.

“Buying dollars during a period of a sharp drop in the won’s value [a surge in the exchange rate] could actually fuel further exchange-rate volatility,” said Prof. Kim Jung-sik “With the United States monitoring foreign exchange market intervention as potential currency manipulation, it is practically difficult to engage in aggressive dollar purchases.”

The costs are also substantial. Interest payments on Monetary Stabilization Bonds issued in the process of buying dollars amounted to 4 trillion won ($2.77 billion) last year, while interest on dollar-denominated Foreign Exchange Stabilization Fund bonds is expected to reach 600 billion won this year.

Many also argue that “defensive capacity” matters more than the sheer size of reserves. The foreign exchange market is less a numbers game than a psychological one. Rather than the absolute level of reserves, what determines defensive strength is how effectively the government and monetary authorities manage market anxiety through strategy and messaging.

“Although it would be difficult, the most efficient option would be for the government to secure a currency swap agreement with the United States,” said Joo Won, head of the economic research division at the Hyundai Research Institute. “Even without a single dollar actually changing hands, it could stabilize the foreign exchange market.”

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.
BY PARK YU-MI [[email protected]]