South Korea is considering a significant policy shift to defend its currency.
The Korean won has been under considerable pressure, recently weakening past 1,510 per U.S. dollar, a level not seen in about 17 years. With traditional tools like raising interest rates constrained by domestic economic concerns, authorities are looking for alternative ways to stabilize the foreign exchange market. This has brought the National Pension Service (NPS), one of the world's largest pension funds, into the spotlight.
The core of the new proposal is to raise the NPS's strategic FX-hedge cap on its overseas assets from the current 10% to 15%. When the NPS hedges its foreign assets, it essentially enters a contract to sell U.S. dollars and buy Korean won in the future. This action increases demand for the won, helping to support its value. A 5 percentage-point increase could unleash an additional $21.5 to $29 billion in potential USD-selling flows, a substantial amount that could help calm the volatile market without adjusting the policy rate.
This discussion is particularly timely for two key reasons. First, the immediate need to address the won's sharp decline. Second, it comes just before Korea's phased inclusion into the FTSE World Government Bond Index (WGBI), starting in April 2026. This inclusion is expected to attract between $56 and $70 billion in passive investment flows into the country. Authorities likely want to create a more stable currency environment to smoothly absorb these large capital inflows.
This move is a direct outcome of the 'New Framework' established in late 2025, a four-party council involving the Ministry of Economy and Finance, the Bank of Korea, the Ministry of Health and Welfare, and the NPS. The goal was to better coordinate policy. Historically, NPS hedging was viewed primarily as a tool for managing its own investment returns. Now, it is being re-framed as a crucial instrument for national macroeconomic stability. However, this shift is not without debate, as some within the NPS express concern about using retirees' savings as a policy lever.
- FX Hedging: A strategy used to protect against losses from fluctuations in currency exchange rates. In this case, the NPS would lock in a future exchange rate to convert its dollar-denominated assets back into won, which involves selling dollars forward.
- World Government Bond Index (WGBI): A broad index of global government bonds from multiple countries. Inclusion typically leads to significant capital inflows from global funds that track the index.
- National Pension Service (NPS): South Korea's public pension fund, managing a vast portfolio of domestic and international assets on behalf of the nation's citizens.