An increase in overseas investment is putting upward pressure on the won-dollar exchange rate, while the effect of rising investment income appears limited. Analysts suggest that without reinvestment of this income domestically, stabilizing the exchange rate remains challenging.
According to a report released by the Bank of Korea on June 18, titled "BOK Issue Note: The Impact of Overseas Investment and Investment Income on Exchange Rates," South Korea's overseas investments have been rapidly increasing, particularly in securities. Last year, direct investment totaled $41.2 billion, down from $49.7 billion the previous year, while securities investment surged to $140.3 billion, more than double the $67 billion recorded the year before.
The Bank of Korea's analysis indicates that a 3% increase in overseas investment leads to approximately a 0.7% rise in the won-dollar exchange rate. Conversely, an 8% increase in investment income results in only a 0.4% decrease in the exchange rate. However, if the reinvestment rate rises by 1 percentage point, the exchange rate is expected to increase by about 0.4%.
The Bank of Korea explained that while expanding overseas investment contributes to the accumulation of foreign assets and increases in investment income in the long term, it also raises demand for foreign currency in the short term, thereby exerting upward pressure on the exchange rate.
Since 2011, the investment income balance has consistently shown a surplus, steadily increasing its share of the current account. Previously, the trade balance primarily drove current account surpluses, but recently, income from accumulated overseas assets, such as interest and dividends, has become more significant.
However, an increase in investment income does not directly translate into a greater supply of dollars in the foreign exchange market. If profits earned by overseas subsidiaries or local firms are not repatriated as dividends or remittances but are retained or reinvested locally, a gap may arise between the statistical surplus in investment income and the actual inflow of foreign currency into the market.
According to the Bank of Korea's analysis, Japan maintains a current account surplus based on primary income surpluses despite a trade deficit. In contrast, South Korea still relies heavily on its trade balance, but the share of primary income is increasing, indicating a shift from a trade-centric structure to one that includes investment income.
Notably, Japan's reinvestment rate has averaged 46% since 2010, higher than South Korea's 40% and significantly above Germany's 28% and Taiwan's 18%. The Bank of Korea suggests that a high reinvestment rate may restrict the domestic reinvestment of investment income, potentially contributing to the yen's depreciation.
South Korea is expected to see long-term increases in investment income as overseas investment continues to grow, driven by aging demographics and declining productivity. However, if the reinvestment rate also rises, the amount of dollars returning to the foreign exchange market may be limited, the Bank of Korea noted.
Shin Sang-ho, head of the Bank of Korea's Capital Movement Analysis Team, stated, "South Korea appears to be entering a transitional phase where the structure of the current account is diversifying. While income generated from foreign assets is positively contributing to the current account and enhancing external payment capabilities, it is difficult to definitively conclude that an increase in investment income will lead to an expansion of domestic foreign currency supply or stabilize the exchange rate."
He added, "In the future, it will be necessary to refine the foreign exchange supply and demand monitoring system based on how much of the increasing investment income from overseas investments is actually reinvested domestically, emphasizing the need to consider not only the scale of investment income but also the reinvestment tendencies."
* This article has been translated by AI.
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