How should we interpret the 'persistent depreciation of the Korean won coupled with 24/7 trading' — a severe divergence between exchange rates and fundamentals? Why is the won continuing to fall?

In theory, such steep currency depreciation would imply a collapsing economy. Yet Korea’s semiconductor exports have surged over 50% year-on-year; its trade surplus hit a record $26.95 billion in May; the KOSPI index has become the global ETF leveraged investment hub, more than doubling in value this year; and Samsung Electronics and SK Hynix share prices have repeatedly reached new highs, with both companies expanding fundraising and investment activities — even collectively planning listings on the U.S. Nasdaq! This indicates a severe decoupling between Korea’s exchange rate and its economic fundamentals. In response, the Korean government appears to aim at enhancing the accuracy and supply of dollar liquidity pricing in domestic markets, narrowing the gap between onshore spot and offshore non-deliverable forward (NDF) rates, lowering foreign investors’ currency hedging costs, and leveraging semiconductors to elevate the won’s long-term international standing — hence the launch of 24/7 won trading starting July 6. But is opening markets during weakness truly advisable? I previously wrote: 'The yen breaks below 162 yen per USD — its lowest level in nearly 40 years. What’s happening to the yen?' Today, I continue along that line of reasoning to analyze Korea — because Korea’s economy is essentially a 'nano-version' of Japan’s, yet even more 'extreme'! (1) The Dilemma: Rate Hikes to Stabilize the Exchange Rate vs. Debt Sustainability Many wonder: With the Bank of Korea’s benchmark policy rate already at 2.5%, why can’t it halt the won’s depreciation? The answer lies in the intractable knot linking interest-rate differentials and debt burdens. Currently, the U.S. Federal Funds Rate stands at 3.50–3.75%, while Korea’s policy rate remains at 2.5% — resulting in a short-end interest-rate differential centered above 250 basis points. Meanwhile, the 10-year U.S.–Korea sovereign bond yield spread remains stable at 190–210 basis points. This substantial positive yield differential continues to boost the attractiveness of U.S. dollar-denominated assets. Even absent equity-market factors, capital outflows from Korea persist. Moreover, the Bank of Korea must simultaneously monitor monetary policies in China, Japan, and the U.S. As of its May 2026 policy meeting, it had maintained its 2.5% benchmark rate unchanged for eight consecutive meetings — even as June’s CPI rose to 3.2% and the won kept hitting new lows. Its reluctance to hike further stems largely from one critical constraint: private-sector debt risk. According to the Bank of Korea’s June 2026 Financial Stability Report, household leverage stood at 88.2%, corporate leverage at 109.8%, and total private-sector credit as a share of GDP reached 197.9% — nearing 198% — placing Korea among the highest-leveraged OECD advanced economies. Furthermore, each 1-percentage-point rise in Korea’s benchmark policy rate adds approximately ₩12.8–13 trillion annually to nationwide household interest burdens. Over recent years, average apartment prices in Seoul’s core districts have stabilized around ₩1 billion, and over 70% of domestic mortgages carry floating rates. Thus, a single rate hike exceeding 100 basis points would cause monthly mortgage payments for many first-time homebuyers to consume half of their disposable income. Combined with the extreme amplification effect in Korea’s stock market, such a move could directly breach banks’ risk-control systems and trigger systemic financial risks.

Exports Hit Record High of $496.7 Billion; Policy Rate Raised to 3% — Korea’s Inflation Dilemma Amid Back-to-Back Rate Hikes

The Bank of Korea’s confidence in implementing 'back-to-back' rate hikes stems first and foremost from an almost mythical export performance. In June 2026, Korea’s monthly exports surged past the $100 billion threshold for the first time in history, reaching $102.25 billion — up 70.9% year-on-year. Korea thus became only the fourth country globally — after Germany, China, and the United States — to achieve monthly exports exceeding $100 billion. For the first half of 2026, Korea’s cumulative exports totaled $496.7 billion, up 48.4% year-on-year — the highest ever recorded for this period. Its cumulative trade surplus reached $138.3 billion, an increase of $110.9 billion year-on-year. Semiconductors alone powered this leapfrog growth. In June, Korea’s semiconductor exports soared to $44.82 billion — up 199.5% year-on-year — marking the first time monthly semiconductor exports surpassed $40 billion. Cumulative semiconductor exports for the first half reached $192.4 billion — exceeding the full-year 2025 total of $173.4 billion within just six months. The global AI infrastructure investment boom is the root cause. U.S. tech giants — including Amazon, Google, and Microsoft — are projected to raise AI-related capital expenditures by 81.5% to $687.7 billion. SK Hynix and Samsung Electronics’ leadership in high-end memory chips like HBM has granted Korean semiconductors exceptional pricing power. Semiconductor exports now account for 42.3% of Korea’s total exports — a new all-time high. According to analysis by the National Assembly Budget Office, semiconductor exports are expected to contribute 0.8 percentage points to Korea’s real GDP growth in 2026. In Q1 2026, Korea’s GDP grew 3.8% year-on-year, with net exports contributing 1.8 percentage points — nearly half of overall growth driven by semiconductor-centered exports. II. Inflation: The Flip Side of Export Prosperity Beneath export prosperity lies mounting inflationary pressure. From January to February 2026, Korea’s CPI remained at 2.0%. It rose to 2.2% in March, 2.6% in April, and breached 3% to reach 3.1% in May — climbing further to 3.2% in June, the highest in 30 months. Though it retreated slightly to 2.8% in July, core CPI (excluding food and energy) rose 2.6% year-on-year — the largest increase since December 2023. At 2.8%, headline inflation remains well above the Bank of Korea’s 2.0% target. More alarmingly, core inflation has stayed above 2% since September 2024 and recently trended upward — a development even more concerning to the central bank than headline CPI. The Bank of Korea maintains its 2026 annual CPI forecast at 2.7%, explicitly stating that 'inflation will remain above target for a considerable period.' Sources of inflationary pressure are multifaceted: On the demand side: Economic growth significantly exceeding expectations, fueled by the semiconductor boom. Korea’s Q2 GDP grew 3.7% year-on-year — surpassing market forecasts. Bank of Korea Governor Rhee Chang-yong explicitly stated that, compared to supply-side shocks, he is more concerned about demand-driven inflation risks. On the supply side: Prolonged Middle East tensions have pushed up global oil prices. As a major energy importer, Korea faces direct imported inflation from rising oil costs. On the exchange-rate front: Although the won has recently appreciated somewhat, exchange-rate volatility remains a key variable in Korea’s inflation trajectory.

South Korea inflation cools to three-month low, but risks remain

Aug 3, 2026

South Korea's consumer inflation eased to 2.8% in July, driven by a 5.5% drop in petroleum prices, though officials warn of persistent geopolitical risks. The Bank of Korea remains cautious following recent interest rate hikes aimed at curbing inflation.

reuters

2026-05-05

South Korea’s Inflation Accelerates on Higher Oil Price Impact

2026-08-03

South Korea inflation cools to three-month low, but risks remain

2026-10-01

South Korea Inflation Stays Sticky, Backing Bank of Korea’s Tightening Bias

South Korea inflation cools to three-month low, but risks remain

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