By Kim Jae-won
Rep. Choi Woon-yeol of the Minjoo Party of Korea has reignited debate on redenomination. He says the authorities should cut the face value of the local currency to 1 percent or 0.1 percent from its current level; meaning that 1,000 won will be replaced by 10 won or 1 won, though its real value will be the same as before.
Last week, the economist-turned-politician said in a CBS radio news show that it was shameful that the Korean won’s exchange rate against the U.S. dollar surpasses 1,000, considering the country’s considerable economic size and leading status on the global stage. It is Asia’s fourth-largest economy, behind China, Japan and India.
Admittedly, it is the only country in the Organization for Economic Cooperation and Development (OECD) whose FX rate tops 1,000, according to the one-term legislator. Choi is a lifelong economist who was a member of the Bank of Korea’s Monetary Policy Board in the early 2000s.
The one-term lawmaker, leading the main opposition party’s task force on economic equality, also said that the redenomination will lower social costs by dropping zeros in statistics data and trading with foreign countries. In fact, cafes and restaurants are already doing so, by deleting three zeros in their menu. It means that they write 3.5 (3,500 won) for an Americano coffee, and 15 (15,000 won) for an alio e olio spaghetti.
Seongnam Mayor Lee Jae-myung showed his support for Choi, anticipating that it will help draw considerable funds from the so-called underground economy through the money exchange process. Lee has drawn national attention for his progressive welfare policies, including paying subsidies to young residents in the city.
But, the Bank of Korea is reluctant to push the idea, being cautious to show its opinion on the issue.
“In principle, it is up to the National Assembly and the people because the impact of redenomination will affect the whole country,” said Kim Dong-kyun, a director at the central bank, in charge of issuing banknotes. “It is the same with foreign countries. Central banks do not lead such an issue, though they can advise on it.”
However, a member of the bank’s Monetary Policy Board said that Korea needs to benchmark the European Union when it considers redenomination. The EU successfully launched its euro currency 17 years ago, taking a major step in European integration. Now, more than 337.5 million EU citizens in 19 countries use it as their currency and enjoy its benefits.
“The key is that people should be convinced that they can exchange their money with the new currency freely. The authorities, especially the tax agency, should not ask where the money is from, allowing them to change their money as much as they want,” said a board member, asking not to be named.
He also said the authorities should not limit the time period for the money exchange, giving people time to adjust themselves to the new system.
But, some researchers argue that the denomination will cause confusion in the market while having little positive effects. They say that redenomination is for countries suffering from hyperinflation, and Korea’s situation is far better than them.
Market watchers also worry that redenomination will cause inflation, but supporters of the currency change say it does not make sense because the country is in danger of entering deflation due to slowly rising consumer prices.
Another group of economists say they are okay with the redenomination, but the timing is not good. They say it is time to focus on other urgent economic issues, such as corporate restructuring, poor exports and low private consumption.
In its modern history, Korea has adopted redenomination two times. The latest one came in 1962 when the military junta led by Park Chung-hee cut the face value of local currency by 10 percent, seeking to absorb funds for economic development. The first one was conducted in the 1950s to calm hyperinflation which occurred during the Korean War.
In the early 2000s, the BOK pushed for introducing redenomination, but the Roh Moo-hyun administration rejected the idea, worrying it could have caused market confusion.