If this is a currency war, then South Korea is breaking out the cluster bombs. Thursday’s quarter-point rate increase, the third in seven months, was the minor detonation the economy needed, amid stubbornly high inflation. Just as significant, though, is Seoul’s simultaneous release of smaller munitions: revived taxes on overseas investment in treasury and central bank bonds, tightened scrutiny of foreign currency derivatives and a proposed levy on foreign exchange borrowings by banks, all in the name of curbing currency swings.
Whether these bomblets will be effective is open to question. The won’s advance against the dollar has been mostly unimpeded since June, when capital controls began in earnest: a 9.9 per cent total return over the past six months is the third highest in Asia. The currency remains one of the region’s most volatile, on both an historical and forward-looking basis.
It is unclear, too, whether the restrictions have driven much foreign capital towards the exits. The KrW2,400bn ($2.2bn) of net sales of domestic bonds by overseas investors in December, for example, could have been influenced by shrinking arbitrage opportunities – three-year Korean Treasuries touched a record-low yield early in the month – as much as by November’s reimposition of sales and income taxes. Some of those outflows from bonds, in fact, may have simply been redirected into Korean equities, which showed net inflows of $3.4bn. The Kospi, up 10 per cent since mid-November, hit an all-time high on Thursday.