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Did Korean Chaebol Follow This Advice Given 2.5 YEARS AGO?

Somehow, I Doubt It
http://www.seoulgyopoguide.com/?p=482

Academics Are Now On Board
In Korea, the Samsung Economic Research Institute is probably the most well-know economic think tank. This guest post recently appear on FT’s blog, which suggests that the Yen’s decline has not yet hit Korea. I would totally disagree with this. The disruption is here, the result is global volatility, equity markets are higher than at any point over the past year, the KOSPI is flat at best. On the flip side, there are those that would have borrowed in JPY from Korea, and they will benefit (like plastic surgeons), or real estate investors. To what extent they have benefited is unknown, but it is there.


Tale of Three Pictures: Nikkei, KOSPI, and JPY/KRW

Toldya

This blog has taken some grief for its analysis regarding the Korean Won, the Japanese Yen, and the fact that Korean chaebol have done well in no small part due to the incredible Yen strength.

Let’s take a look, shall we?

The KOSPI hasn’t moved over this last two years.

Chart forKOSPI Composite Index (^KS11)

Now, this is the Nikkei (Japanese stock market), which is now at a 5-year high.

Chart forNIKKEI 225 (^N225)

And now, the punchline:  this is the KRW/JPY exchange rate.  The lower the number, the stronger the Korean Won, compared to the Japanese Yen.


Bullets Intact, Overshooting Prevented, BOK Does Its Job

Giving Credit Where Credit is Due
Those who have read this blog in the past know this fact: the Seoul Gyopo Guide is no apologist for the Korean government. However, you should make no mistake, the Bank of Korea deserves an A PLUS for its behavior and prudence under the strangest confluence of internal and external factors influencing its economy, and therefore, the Korean people. I repeat: the Bank of Korea has had the right, the obligation, to maintain its wait-and-see approach with respect to interest rates. Today, surprisingly, the Bank of Korea moved, and reduced interest rates by 25 basis points, from 3.25% to 3.00%.


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Bank of Korea to Everyone: Eff You, ‘Nuff Said

Bank of Korea Raises Interest Rates
Read other posts on this blog: the Bank of Korea has a difficult job. It meets every month to determine the path of interest rates. The financial markets attempt to predict what the Bank of Korea will do, and financial instruments, including the value of the Korean Won, move in anticipation of policy adjustments. This happens with every currency around the world. Some people believe that transparency with respect to the scope and timing of interest rate changes is important. WRONG. Independence, and the element of surprise are far more important elements that the Bank of Korea should fight hard to retain. By taking the market by surprise this week, it has done that. Bravo to the Bank of Korea, as it has collectively said to the world: back off.


Korea’s Indebtedness Is A Problem

Rising Interest Rates & High Debt Levels: A Bad Combination
The Seoul Gyopo Guide has been pointing out two areas of concern for the Korean economy: lower real estate prices and heavy indebtedness occurring as a result of inflation the high cost of living. The Dong-A Ilbo pointed out that indebtedness in Korea has soared.

Bank of Korea’s Difficult Task Continues
The Bank of Korea (BOK) has had an unenviable task. Inflation has increased, in part because import prices are high. Why is that? The Korean Won is weak. However, that same, weak Korean Won encourages exports of Korean-made products. Usually, central banks use the level of interest rates to dampen inflation. The BOK has been widely expected to continue to increase interest rates. However, at the same time, the BOK has been believed to have been intervening in the foreign exchange markets in order to weaken the Won. In short, the Bank of Korea is in between a rock and a hard place. Recent actions suggest that the BOK is trying to have it both ways.


Korean Food Inflation Highest in OECD

Food Inflation at 11.6% Over One Year
A number of headlines from the news, who are telling us what we already know. Inflation is getting to be very painful in Korea.
Here are the headlines:

The difficult balance among inflation, foreign exchange rates, and interest rates continues.  As the first two articles correctly state, much of the source of inflation is due to supply difficulties.  The only way to combat supply issues, when those supplies originate from foreign countries is to have a stronger currency.  A stronger currency is usually correlated with higher interest rates.  The difficult position posed by this combination has already been explained early this year, and can be reviewed here.

Japan’s Tragegy = Bank of Korea’s Opportunity? Just Maybe
Oddly, the earthquake may provide the BOK some needed flexibility. How is that? Well, the fact is the Japanese will need to buy the Yen. The reason is that Japanese will need to bring back money back to Japan in order to pay for the massive human tragedy. Insurers will need to pay claims denominated in the Yen. In short, there will be demand for the Yen over time. Since the JPY/KRW exchange rate is the real mechanism through which Korean conglomerates have benefited, the Bank of Korea can allow the Korean Won to strengthen versus the USD, while not necessarily strengthening against the Japanese Yen. The result would be stronger purchasing power for the Korean Won to pay for more expensive raw materials and imported food. Of course, it cannot be that simple, and it will not be. The impact of the Japanese tragedy on global demand for end products (including Korean-made ones) is unknown. Nevertheless, the Bank of Korea may be able to allow a stronger Won in order to aid against the obvious inflationary pressures facing everyday Koreans.


Four Savings Banks Close in Korea: Why This is a Problem

The Largest Savings Bank in Korea Has Closed
The Wall Street Journal has reported what Koreans already know: savings banks in Korea are in trouble.  This past week, 4 savings banks, including the nation's largest, was seized by the government.  The reason?  People who had their savings in those banks have withdrawn their money, and that has led to greater fear by the remaining depositors.  The result?  More people withdraw their money, and a vicious cycle begins.  This is known as a "run on the bank."

Run on the Bank is a Comment on Koreans' Confidence in Government

Criticism of the BOK's Decision is (Largely) Unfounded

The Bank of Korea Has Taken Criticism for its Recent Decision
 The other day, the Bank of Korea (BOK) kept its target interest stable, which was different from market expectations.  Market participants widely believed that another rate increase would occur. In the Wall Street Journal's Korea Blog, it was reported that the Bank of Korea has received a great deal of criticism about this most recent decision.  The Seoul Gyopo Guide believes that over time, interest rates must increase in Korea.  However, the criticism is unfounded because the situation is far more difficult than has been reported.  The Seoul Gyopo Guide has described the Bank of Korea's difficult position here, three weeks ago. 
  

Destination: Bank of Korea Museum



Don't be too surprised that I'm fascinated by money. A museum of money? Sure, it's a fairly touristy place in downtown Seoul, but still somewhere I needed to check out.

First established on June 12, 1950, the Bank of Korea began functioning as a central bank in the turmoil following World War II. Within a month new banknotes were issued:



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