Bank of Korea Warns of Potential Asset Market Concentration in Short-Term Funds in Circulation

Bank of Korea Monetary and Credit Policy Report

"Monetary Policy to Maintain Easing Stance"
"Possibility of Continued Capital Inflow into Housing Market... Will Monitor Closely"

[Asia Economy Reporter Kim Eun-byeol] The Bank of Korea revealed that economic agents such as households and businesses are managing a significant portion of their money in short-term financial products due to uncertainties caused by the novel coronavirus disease (COVID-19). They are putting money only into financial products that can be immediately converted into cash in emergencies, and the Bank of Korea cautioned that such short-term funds could potentially flow into asset markets.

On the 10th, the Bank of Korea stated in its 'Monetary and Credit Policy Report' that "During the COVID-19 policy response, the growth rate of money supply rose rapidly, and economic agents are managing a substantial portion of money in short-term financial products."

According to the Bank of Korea, when breaking down the increase in M2 (broad money) during the first half of the year by financial product (M1 and excluding M1), M1, which consists of demand deposits (+72.6 trillion won) and checking deposits (+49.1 trillion won), increased by 133.0 trillion won, accounting for 80.7% of the total M2 increase (164.9 trillion won).

On the other hand, medium- to long-term financial products not included in M1, such as time deposits and investment trusts, increased by 31.9 trillion won during the same period, showing a relatively modest rise. The M2 growth rate (average balance, year-on-year) sharply increased from 7.9% in December 2019 to 9.9% in June this year.

Lee Sang-hyung, Director of the Monetary Policy Department at the Bank of Korea, explained, "Due to the low interest rate environment, the interest incentive for medium- to long-term financial products has weakened, and corporate funds are being managed short-term. As a result, the M1/M2 ratio rose significantly from 31.8% in December last year to 34.4% in June 2020."

On the 10th, a briefing session for the Monetary and Credit Policy Report (September 2020) was held at the Bank of Korea in Jung-gu, Seoul. From the left in the photo: Choi Chang-ho, Head of Trend Analysis Team; Park Jong-seok, Deputy Governor; Lee Sang-hyung, Director of Monetary Policy Bureau; Bong Gwan-su, Head of Policy Cooperation Team. Photo by [photographer's name]

There is concern that if money is tied up only in short-term financial products, it may lose direction and flow solely into asset markets such as stocks or real estate. Director Lee said, "As market liquidity shows signs of shortening, it is necessary to closely monitor the possibility that short-term funds may flow into asset markets in pursuit of returns."

Regarding the recently surged real estate market, the Bank of Korea pointed out that although the upward trend in housing prices somewhat slowed in August, it is difficult to rule out the possibility of continued capital inflows. While government measures and economic uncertainties due to the resurgence of COVID-19 may slow housing price increases, factors such as increased housing transactions, rising jeonse prices, and expanded supply of pre-sale and move-in units in the second half of this year could act as upward pressures.

However, the Bank of Korea explained that the rapid increase in money supply during the COVID-19 response was mainly due to a significant expansion of liquidity supply to the corporate sector. Corporate credit from deposit-taking institutions (banks + non-banks) increased by 125.2 trillion won in the first half, marking the largest increase since statistics began in December 2001. Director Lee said, "Most of the large-scale liquidity supplied to companies appears to have been used for business activities to overcome the COVID-19 shock. Working capital loans increased by an average of 13.7 trillion won last year (quarterly average), but rose by 44.9 trillion won in the first half of this year, showing a substantial increase."

Meanwhile, the Bank of Korea announced that it plans to maintain an accommodative monetary policy stance as COVID-19 continues to spread globally and domestic economic uncertainties increase.

Director Lee said, "Due to strengthened social distancing measures domestically, private consumption recovery, especially in face-to-face services and overseas consumption, may slow more than expected. Considering the high uncertainty in the global economy, it is difficult to rule out the possibility that exports may also experience delayed recovery."

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