Beyond Korea’s 'recession sensitivity syndrome'

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Beyond Korea’s 'recession sensitivity syndrome'

Published: 25 Nov. 2025, 00:02

Audio report: written by reporters, read by AI

Suh Kyoung-ho

The author is an editorial writer at the JoongAng Ilbo.

“Government officials still do not understand how companies actually operate.”

A senior executive at a major conglomerate said this after the government asked leading exporters to “cooperate in stabilizing the exchange rate.” When I asked why firms delay converting export proceeds into won, his response was blunt. “We are not piling up dollars. We calculate liquidity needs in real time across global operations and use dollars as short-term assets.”

A passerby looks at currency exchange rates at a private money exchange booth in Myeongdong, central Seoul, on Nov. 24, when the won closed at 1,477.1 per dollar, up 1.5 won from the previous day. [YONHAP]

In short, whether companies “cooperate” with currency stabilization has little to do with patriotism and everything to do with interest rate differentials. The U.S. Federal Reserve’s policy rate stands between 3.75 and 4 percent, as much as 1.5 percentage points higher than Korea’s 2.5 percent. With plenty of short-term financial instruments generating returns above 4 percent, exporters have little incentive to convert dollars early and sacrifice yield. Firms are also aware that the exchange rate, now in the upper 1,470 won range, may rise further. Added pressures include the investment commitments tied to ongoing tariff negotiations with the United States and continued enthusiasm for overseas securities investment among Korean residents.

The exchange rate reflects a country’s overall economic fundamentals. At the end of last month, the real effective exchange rate — which measures the won’s purchasing power against major trading partners — fell to its lowest level since the global financial crisis. It is a warning signal from the market.

Today’s high exchange rate is not a replay of the foreign exchange crises of the late 1990s or 2008, when Korea struggled to secure dollar liquidity. But the current level itself has become a burden. Import prices are rising, small and mid-sized firms face higher raw material costs, and media reports about tuition payments abroad weighing heavily on families have become more common.

There is no quick fix. The fundamental solution is to strengthen economic fundamentals and maintain sound macroeconomic management. This is why former senior presidential secretary for economic affairs Yoon Jong-won argued in a recent JoongAng Sunday column that loosened monetary policy and widening fiscal deficits are adding upward pressure on the exchange rate. He called for reviewing the appropriateness of the current interest rate stance, reducing fiscal deficits that now exceed 4 percent of GDP to the 2 to 3 percent range and speeding up the introduction of fiscal rules. His argument is persuasive.

The Economist recently ran a piece titled “The Vanishing Recession,” noting that recessions have become rare, almost like an endangered species. But this rarity has its dangers. Joseph Schumpeter emphasized the importance of “creative destruction.” Recessions, though painful, clear out uncompetitive players, redirect resources to more productive sectors and promote long-term efficiency. Without this cleansing effect, risk builds silently in the system.

If an economy goes too long without a meaningful downturn, asset bubbles can proliferate. Market participants take greater risks in stocks and other volatile investments, and governments spend heavily to avoid downturns. Korea is no exception. The stock market has cooled slightly in recent weeks but remains elevated, fiscal deficits continue to rise, and national debt threatens long-term sustainability.

President Lee Jae Myung delivers a policy speech on next year’s government budget at the National Assembly’s main chamber in Yeouido, western Seoul, on November 4. [JOINT PRESS CORPS]

This is not to argue that the government should stand idle in the face of a downturn. The concern is that the government has incentives to respond excessively. I have seen many officials argue for stimulus before restructuring can begin, saying, “We must strengthen the patient before surgery.” Korea’s hypersensitive tendency to overreact to recessions — what might be called “recession sensitivity syndrome” — leads to heavy-handed policy intervention. Avoiding a recession is desirable, but the price must not be disproportionate.

As the National Assembly enters the final stage of budget review, it should cut back on cash handouts and show that fiscal discipline will not be compromised. At this week’s meeting of the Bank of Korea’s Monetary Policy Board, where a rate hold is expected, the board should send a pre-emptive signal that the easing cycle is ending. The top priorities for macroeconomic policy right now are stabilizing the exchange rate and housing prices.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.