Is the Bank of Korea's Simple Purchase of Government Bonds Essentially Quantitative Easing?

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] The Bank of Korea has initiated its first outright purchase of government bonds this year, which analysts interpret as a de facto step toward quantitative easing. However, some view it as a one-time purchase aimed at market stabilization, and since there was no official declaration from the Bank of Korea, it is difficult to consider it as quantitative easing in the usual sense.

According to the Bank of Korea on the 22nd, on the afternoon of the 20th, the Bank conducted a purchase of government bonds worth 1.5 trillion won (face value) to stabilize the bond market. The targeted securities were five types of government bonds with maturities of 3, 5, and 10 years. This marks the first time in over three years since November 2016 that the Bank of Korea directly purchased government bonds. Previously, during the financial crisis in November 2008, the Bank also purchased 1 trillion won of government bonds for market stabilization purposes.

With the supplementary budget of 11.7 trillion won passing the National Assembly and government bond issuance continuing to raise funds, there were concerns that the influx of funds into the market would further shrink the already frozen corporate bond market due to the "crowding-out effect," prompting a preemptive increase in government bond purchases.

The difference with this outright purchase compared to previous ones is that the Bank of Korea clearly stated the purpose as "market stabilization." In the past, outright purchases were mainly to secure bonds needed for repurchase agreement (RP) sales transactions.

As instability in the government bond market has recently intensified, the Bank of Korea announced, "We are closely monitoring the bond market situation, including the sharp rise in government bond yields," and "If necessary, we plan to take appropriate market stabilization measures through open market operations."

However, a Bank of Korea official drew a line, saying, "This was a one-time purchase for market stabilization purposes and differs in nature from foreign quantitative easing, which involves large-scale bond purchases over a certain period."

Meanwhile, the Bank of Korea recently conducted RP purchases targeting securities firms. Earlier this month, on the 12th, the Bank announced that it would conduct RP purchase tests targeting non-bank sectors to create conditions for more rapid and extensive liquidity supply when needed.

While the Bank of Korea regularly conducts RP transactions with commercial banks as part of open market operations, including non-bank sectors as RP transaction counterparts is the first time since the 2008 financial crisis.

A Bank of Korea official said, "Considering that RP purchase transactions targeting securities firms were suspended after the financial crisis, we expanded the transaction counterparties for operational review." Industry experts analyze that the Bank of Korea may also reduce the issuance of Monetary Stabilization Bonds or conduct early redemptions.

This content was produced with the assistance of AI translation services.