The Bank of Korea published an issue note concluding that Korea's external adjustment mechanism has shifted from one led mainly by goods exports and KRW appreciation to one increasingly shaped by financial shocks, allowing current account surpluses to coincide with KRW depreciation. It links the prolonged pattern seen since 2023 Q2 to stronger resident demand for dollar assets and higher saving, rather than to the goods shocks that had historically driven surplus episodes and currency appreciation. Underlying that shift, Korea's external asset mix has moved since the Global Financial Crisis away from reserve accumulation and toward private-sector overseas portfolio investment, while demographic aging and weak domestic investment have lifted savings. Korea became a net external creditor in 2014 Q3 and, by end-2025, had gross external assets of USD 2,875.2 billion and net foreign assets of USD 904.2 billion, with reserves down to 14.9% of external assets and portfolio investment up to 44.1%. The note finds that positive financial shocks associated with capital outflows and KRW depreciation have become more frequent since 2015, and estimates that during such periods a 1 percentage point rise in the current account-to-GDP ratio is associated with a 0.65 percentage point increase in the real USD/KRW exchange rate. Historical decomposition attributes more than 80% of real exchange rate fluctuations since 2000 to financial shocks, with dollar asset demand and saving demand each contributing 9 percentage points to the cumulative 19% rise in the real USD/KRW rate. The note adds that Korea's exchange rate response to financial shocks is larger than in major advanced economies, which it links to relatively shallow foreign exchange market depth and the concentration of residents' external portfolio investment in U.S. assets. It says resident capital flows now matter more for foreign exchange stability and points to a need for measures that address short-term foreign exchange supply-demand imbalances alongside longer-term efforts to deepen the market.
Bank of Korea2026-04-17
Bank of Korea issue note finds resident dollar asset demand and higher savings are increasingly driving KRW depreciation alongside current account surpluses
The Bank of Korea said Korea's widening current account surplus is increasingly occurring alongside KRW depreciation because financial shocks, especially resident demand for dollar assets and higher savings, now outweigh export-led goods shocks. The note links the shift to private-sector overseas portfolio investment, aging and weak domestic investment, and says Korea's relatively shallow foreign exchange market makes the won more sensitive to these outflows. It points to the need to manage short-term foreign exchange imbalances while deepening market depth.