Some consider renewed debate as 'vote-seeking' attempt
By Lee Kyung-min
Currency reform, more specifically "won redenomination," has again become a political hot potato in Korea.
Ever since the country joined the OECD, redenomination, which aims to change the face value of won banknotes and coins from 1,000 to 1, has become a major issue whenever a new administration takes office
The par value of Korean currency has remained unchanged despite the rapid growth of its economy for the past 57 years. As a result, the won has the lowest face value with a four-digit exchange rate against the U.S. dollar among 35 OECD member nations.
Bank of Korea (BOK) Governor Lee Ju-yeol has rekindled this age-old debate recently. At a National Assembly committee meeting in late March, he said the time was ripe to discuss the redenomination of the won.
The debate is gaining further momentum after former BOK Governor Park Seung, an economic adviser to President Moon Jae-in, said in a media interview that he would suggest redenomination to the President.
Experts are split over the reduction of the face value of the Korean currency but a majority of them are against the idea, claiming redenomination will do more harm than good for the economy if it takes place in the near future.
Proponents claim the currency should better reflect and represent the economy that has grown rapidly over the decades.
"Korea's economy has grown over 4,800 fold (in terms of GDP) since 1962 and inflation has also jumped 36 fold, a reason why a Korean currency with fewer zeroes is more befitting Asia's fourth-largest economy in the global stage," said Park.
"The cost needed in the redenomination can be derived from a supplementary budget likely to be drafted soon."
Also, they said the country will benefit from redenomination as it will save costs on currency management. The BOK spent 63.9 billion in 2018, to replace 37 million damaged coins and 590 million damaged banknotes.
However, opponents argue that there is no reason for Korea to hurriedly pursue redenomination citing low inflation and the limited cost-saving.
They stress that the Korean government should focus on more urgent economic issues, describing the move as a "vote-seeking" attempt one year ahead of the general election slated for April 2020.
"Redenomination is needed when countries experience inflationary pressures as it is easier to increase prices when currencies change to the dollar to a several-digit number," Alicia Garcia-Herrero, Asia-Pacific chief economist at Natixis Global Market Research, told The Korea Times.
"However, this is not the case of Japan or Korea, so I see no need to redenominate the won. There are more urgent issues to tackle in Korea than this."
She made it clear that the issue has no economic importance, adding the timing suggests this is more of a "vote-seeking" attempt rather than practicality-oriented issue.
"One reason it may be discussed now is a populist one. Citizens like to see their currencies fare against U.S. dollars ― like the euro or the British pound. In reality, this has no economic importance."
The importance of a country, she added, is independent of the number of zeroes that need to be removed from the currency to exchange it for the U.S. dollar, a view echoed by another economist.
While some people think of having lots of digits as a sign of a "weak currency," this is not correct, according to Antonio Fatas, an economics professor at INSEAD.
"What matters is what the currency does going forward, not the number of zeroes in prices," he said.
In his view, Korea does not need won redenomination now because the cost of handling more digits is smaller compared to the potential disruption of redenomination.
"At the end, it is purely an efficiency question. From a practical point of view, handling fewer zeroes has some advantages, although small. And there are no obvious macroeconomic advantage of changing the units of a currency," he said.
In addition, with Korea's "healthy" economy with low inflation, redenomination could question the stability of the Korean currency, especially overseas, according to Sohn Sung-won, an economics professor at Loyola Marymount University in Los Angeles.
"Typically, countries with wobbly economies and high inflation resort to redenomination. The economy has worked fine with the current system. There is a saying in English: if it ain't broke, don't fix it."
Another potential pitfall from redenomination is property speculation, according to experts.
"Whenever this issue has come to the fore in the past, we have seen a brewing speculative sentiment in the property market," a real estate market watcher said.
He explained that once it is carried out, people may become less sensitive to the fluctuation of real estate prices because there will be fewer zeroes.
No rash decision
In principle, redenomination is needed for countries undergoing hyperinflation, or when underground economy accounts for too large a portion of a country's GDP so that it needs to be brought into the official economy to foster investment.
"Korea has neither of those problems," said an economist from a private think tank on condition of anonymity. "At this point, the issue is simply moot for discussion."
He pointed out that redenomination will bear significance if and only if Korea's currency becomes one of the major global currencies, but the prospect remains slim and the extent of the effect is uncertain.
Experts said it is important to take sufficient time before pushing for redenomination, suggesting Korea take a cue from the European Union.
"An example of the successful launch of the euro currency by the European Union in 2002 will serve the country well," said Yang Joon-mo, an economics professor at Yonsei University.
"Exchanging old currency for a new one should be allowed for a long period of time, say, for about a decade."