Trade surplus no longer shields weak won, BOK says

Bank of Korea headquarters in Seoul / Courtesy of Bank of Korea

For decades, Korea’s economic playbook followed a familiar pattern: Strong exports of semiconductors and automobiles produced trade surpluses that, in turn, tended to support the won. But a Bank of Korea (BOK) report released Friday suggests that link has weakened, pointing to a structural shift in how the currency interacts with global markets.

Despite a steady account surplus since 2015, the real value of the won has continued to fall. Since 2023, that gap has widened; even as the surplus grew, the currency has depreciated faster than many peers.

The central bank attributes the “decoupling” to a major change in capital flows. Where surplus dollars once accumulated in official foreign exchange reserves, they are now increasingly directed by private investors — from institutional and individual investors to pension funds — seeking returns abroad.

Much of that capital is flowing to the United States.

As of 2024, more than 63 percent of Korea’s overseas securities investments were concentrated in the U.S., far above the 25.3 percent average among other advanced economies.

That shift has been reinforced by demographics.

Korea’s rapidly aging population has increased retirement savings while dampening domestic consumption, pushing more investments into foreign markets and contributing to persistent pressure on the won.

BOK warned that this new environment leaves the currency more exposed to global shocks. With a relatively narrow investor base and lower trading volumes than other major currencies, the won has become more sensitive to swings in global sentiment. To reduce volatility, the central bank said the government may need to deepen its foreign exchange market and broaden participation from global investors.

This article was published with the assistance of generative AI and edited by The Korea Times.