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President-elect Heralded Implementation of Policy Measures for Currency Rate Protection
Price Stabilization
President-elect Heralded Implementation of Policy Measures for Currency Rate Protection
  • By matthew
  • February 21, 2013, 10:09
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“President-elect Park Geun-hye has frequently mentioned price stabilization in the interest of people’s livelihood, causing many in the foreign exchange market to forecast a drop in the won-dollar rate, but I guess that the market will be seeking its direction anew from today on,” said Korea Exchange Bank manager Lee Kun-hee on February 20. The remark reflects how foreign exchange market participants think about the incoming president’s suggestion of a preemptive response for exchange rate stabilization.

They are considering the president-elect’s remark as a preparation against a drop in the exchange rate. Also, they are expecting that foreign exchange speculators will lose ground down the road with the next president herself having given a verbal warning, which is quite unprecedented. “It seems that she, by saying so, expressed her will to forestall foreign exchange speculation taking advantage of the government change and administrative vacuum,” said an industry insider.

Under the circumstances, many people are paying keen attention to whether and when the foreign exchange authorities will exert its influence. At present, there are three cues to predict the intensity of her future policy for foreign exchange stabilization: the fact that she mentioned the current weak yen trend (with regard to policy direction); her promise to keep companies from the loss that could be caused by foreign exchange fluctuation (foreign exchange level); and her commitment to preemptive actions (speed of policy implementation).

Experts are saying that her mentioning of the weak yen could lead to some measures to protect the value of the local currency. According to them, there is some possibility that the Korean government would take self-defensive action even without international cooperation if the weak yen trend would be continuing for a while under a tacit agreement among major economies.

Specifically, tax, monetary and supervisory policies are mentioned as tools to serve the purpose. Punitive taxes could be imposed on speculative transactions while the base interest rate is cut in order to prevent the inflow of hot money and strengthen the soundness of foreign exchange transaction on the part of financial companies.

The effect of the policy mix differs depending on how to combine the three measures. The market consensus is that a tightened financial supervision will be followed by stricter tax policy and monetary response. When it comes to the closer supervision, three regulatory mechanisms are on hand, that is, forward position limitation, charges allotted for foreign exchange soundness and taxation on foreigners’ bond investment. The government can put into force some of them through legal amendments without having to go through the National Assembly.

Concerning the stricter tax policy, selective taxation on speculative foreign exchange and bond trading is under consideration. Recently, Korea Institute of Public Finance president Jo Won-dong, who introduced the topic for the first time, has been appointed as the Senior Secretary to the President for Economic Policy, making the implementation of the policy more likely. It has to go through legislative procedure, though.

The monetary policy including interest rate cut can be initiated immediately but the government is considering it as the last resort because it could only backfire without international cooperation. If the government indeed came to a situation in which monetary policy should be used, this could result in a currency war against the weak yen.