Take thorough currency action

Deputy Finance Minister Choi Jong-ku is on the front lines of defending the Korean won, which has fallen sharply in recent months. He is referred to as Mr. Won, similar to Eisuke Sakakibara, the former official of Japan’s Ministry of Finance, known as Mr. Yen on the foreign exchange market.

In a seminar on Wednesday, Choi said the government should adopt taxation on financial transactions to regulate short-term foreign capital as soon as possible. It is the first time that a senior currency policy official floated the idea of importing taxation on cross-border currency, equity and bond trading. He refrained from likening the new measure to the Tobin tax, which refer to excise taxes on cross-border currency trading proposed by Nobel-laureate American economist James Tobin. In 1972, Tobin argued that if governments levied similar taxes to raise the cost of currency transactions, exchange rate speculation could be curbed through “sand-in-the-wheels” effect, which would ease the problems caused by currency volatility.

The government has been opposed to an outright levy on financial trading in fear of scaring off foreign capital and scaling down the local market volume. It is also worried taking unilateral control would undermine the credibility of the local market. But authorities now believe circumstances have changed and a new defense mechanism is in order. The international financial market is inundated with loose capital. Since the global financial meltdown in 2008, the central banks of the United States, Japan and European Union have pumped out as much as $5 trillion. The money so far remains stable, but if they make a unified move a small financial market could easily be wiped out. It is why authorities worldwide, especially in emerging markets, are keeping vigilance against the danger.

So far local measures were aimed to regulate capital inflow. The new action should target outflows Korea experienced a traumatic financial crisis in the late 1990s due to a sudden exodus of foreign capital. The local markets also shook during the 2008 financial crisis. Since then, the central bank has been busy building piles of foreign exchange reserves over $320 billion. We also could benchmark Indonesia’s case where foreign investors are required to hold treasury debt for at least six months. But the new measures must be impeccable as not to upset the market. The market has already been jumpy since the report. Sweden, which levied taxes on stock and bond trading in 1984, suffered sharp volatility and losses and had to lift the taxation in 1991. Authorities must be thorough in their new action.