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Bank of Korea Governor Rhee Chang-yong said he will continue to stay on high alert over the high exchange-rate environment even at the start of the year. “We will manage expectations for a weaker won that have been formed mainly among domestic institutions,” he said. On the National Pension Service’s overseas investment, he stressed that “this is not about blaming it, but about there being no need to buy additional dollars at 1,480 won (a high level for the exchange rate).”

Rhee made the remarks after speaking to reporters following the year-opening ceremony held on the morning of the 2nd at the BOK auditorium on Namdaemun-ro in Seoul. Asked whether vigilance in the FX market would persist into the new year, he said, “The exchange rate right now is being driven by domestic institutions’ expectations,” adding, “There is a need to manage those expectations.” His comments suggested that the FX authorities’ market intervention, which continued toward year-end to stabilize the won, could also extend into the beginning of the year. On what would be an appropriate exchange rate, he said it was “hard to talk about,” but explained that “a substantial part of the move reflects expectations at work, as we have diverged from the dollar index and the won has risen much more than others.”

Rhee noted that while overseas investment banks (IBs) mostly forecast the exchange rate in the low 1,400-won range, domestic institutions are looking at higher levels such as 1,480 won and 1,500 won. “This year there is an expectation that ‘$20 billion (in investment in the U.S.) will flow out, and the NPS will invest overseas mechanically,’” he said, adding that “this needs to be adjusted.”

On the $20 billion overseas investment figure, he stressed, “It will by no means go out mechanically.” He said the BOK would “play the role of the treasurer,” adding that in a situation that could affect the FX market, Monetary Policy Board members “will not allow (the use of FX reserves).”

Regarding the NPS, he said from a macroeconomic perspective there is a need to calibrate the pace of investment. “Even if the NPS invests overseas, there is no need to do so at the same pace when the exchange rate is 1,480 won as when it is 1,400 won,” he said. “When the exchange rate is high, it should invest only what is necessary and delay the rest, then increase the pace when the exchange rate falls.”

Responding to criticism that “mobilizing the NPS undermines long-term returns,” he said, “If overseas investment affects the FX market and pushes the exchange rate higher, returns on U.S. investments look very strong, but the opposite happens when you bring the money back.” He added, “Considering this, we need to do more FX hedging than we do now, and also reduce the share going overseas somewhat.” He added, “I’m not sure that this undermines returns.”

Rhee also noted that he is an academic who has emphasized the need for the NPS to invest abroad. While serving as a professor in the Department of Economics at Seoul National University, he led the mid- to long-term investment policy team in the “National Pension mid- to long-term fund management master plan task force” formed by the Ministry of Health and Welfare in 2004. At the time, he argued that overseas investment should be increased in stages while noting it could cause shocks to the FX market.

He pointed out that while he supported overseas investment, setting FX hedging at “zero” is “theoretically hard to accept.” The reason, he said, is that returns need to be locked in when it is time to bring overseas assets back home.

He also said it is not correct to cite Canada as grounds for arguing for 0% FX hedging. “Canada issues about 20% in dollar-denominated bonds to invest, so it has a structure with both dollar assets and liabilities,” he said, explaining that “this is the same as implementing about 20% FX hedging.” He added, “The NPS said it would issue external debt to reduce its impact on the FX market, and because that provides FX hedging, I think it’s a good method.”

Rhee also said, “It is also a problem that as the NPS moves overseas, the domestic market becomes structurally unable to grow,” adding, “We need to consider, at the level of the overall national economy, the costs of people in Korea not being able to find jobs, and of the exchange rate surging and making it difficult for importers.”

He stressed, however, that analyzing the causes of a high exchange rate is not about blaming any particular economic agent. “We scientifically and objectively analyzed which factors affect the FX market,” he said, adding, “It’s regrettable that all analysis gets brushed aside as ‘blaming someone.’”

Reporter Kang Jin-kyu josep@hankyung.com