First Meeting of the 4-Party Consultative Body: Finance Ministry, Welfare Ministry, Bank of Korea, National Pension
Attention on Possible ‘National Pension Currency Hedge’ Strategy
Concerns about Impact on Returns, but ‘Review Utilization’
“Minimal Impact of the National Pension on the Market…
Bank of Korea’s Forex Stabilization Measures Must Accompany”
[Sejong=Edaily Reporters Kang Shin-woo, Lee Ji-hyun, Song Joo-oh] With the won-dollar exchange rate hovering in the mid to high 1,400 won range, the government has officially started considering using the National Pension to stabilize the exchange rate.
On the 24th, it was reported that the Ministry of Economy and Finance, the Ministry of Health and Welfare, the Bank of Korea, and the National Pension Service held their first working-level meeting to discuss the high exchange rate situation and response measures.
Following the meeting, the Ministry of Economy and Finance stated in a press release, “We have formed a 4-party consultative body to monitor the impact of the National Pension’s overseas investment expansion on the forex market,” adding, “We have launched the first meeting today, and moving forward, we will discuss ways to achieve a harmonious balance between the profitability of the National Pension and the stability of the forex market.”
The establishment of this consultative body is interpreted as a response to the prolonged exchange rate increase, highlighting the need for policy intervention. Until now, the government has taken a cautious stance, concerned that involving the National Pension in forex market stabilization could burden the fund’s profitability. However, as the exchange rate remains in the high 1,400 won range, there is a growing sentiment that “all available policy tools should be reviewed.”
Two scenarios are being strongly considered as exchange rate stabilization measures by the 4-party body. The first is the activation of a strategic currency hedge by the National Pension. If the exchange rate surges beyond a pre-set threshold, the National Pension would sell a certain proportion of its overseas assets in dollars to supply them to the market. This method is expected to ease upward pressure on the exchange rate by increasing dollar liquidity.
Another approach is to extend or expand the foreign exchange swap agreement between the Bank of Korea and the National Pension. If the National Pension swaps dollars with foreign reserves held by the Bank of Korea instead of purchasing them directly from the market when securing funds for overseas investments, the overall demand for dollars in the market would decrease, easing exchange rate pressures. Currently, a swap agreement with a limit of $65 billion exists between the two institutions, set to expire at the end of this year.
However, both options carry significant burdens. Excessive use of strategic hedging could harm the long-term profitability of the National Pension, and foreign exchange swaps have previously drawn attention from the U.S. Treasury, which designated Korea as a currency observation target, indicating a need for careful action.
Jeong Eun-kyeong, Minister of Health and Welfare, also emphasized at the 6th National Pension Fund Management Committee meeting that “exchange rate instability and increased external market volatility could pose risks to the fund’s operations,” urging the fund management headquarters to “analyze market conditions closely and respond swiftly to maintain profitability and stability.”
The government is considering strategic currency hedging by the National Pension as a stabilization tool, but opinions suggest that its actual impact may be limited.
A government official explained, “In the past, the National Pension directly purchased up to 60% of the dollars needed for overseas investments from the market, but recently, with the increase in individual investor activity, this proportion has fallen to 18%.” The official added, “Even if the National Pension acts, its overall impact on the market is not as significant as before. Therefore, short-term exchange rate stabilization will ultimately require concurrent forex stabilization measures from the Bank of Korea.”