'Direct Purchase of Government Bonds and Reserve Fund Easing'... The Bank of Korea Swayed by Politics

Ruling Party Raises Pressure: "Directly Purchase Government Bonds... Release Reserve Funds"
Bank of Korea Governor Resists: "Direct Acquisition of Treasury Bonds Not Desirable"

[Asia Economy Reporters Eunbyeol Kim, Sehee Jang] The political sphere, which is pressuring the government to loosen fiscal policy, is now targeting the Bank of Korea. This demand calls for the central bank to take a more proactive role in responding to the economic shock caused by the COVID-19 pandemic, and the intensity of these demands is gradually increasing. When the market was shaken at the beginning of the COVID-19 outbreak last year, the Bank of Korea was urged to purchase non-investment grade corporate bonds, and recently, the focus has shifted toward having the Bank of Korea manage employment shocks as well. In particular, there are calls for the Bank of Korea to directly absorb government-issued bonds or to release funds that have been reserved to prepare for financial market shocks. This could create a burden where the Bank of Korea must purchase government-issued bonds at any price, rather than buying appropriate amounts based on market conditions in the bond secondary market.

According to the political sphere on the 24th, Yang Kyung-sook, a member of the National Assembly’s Planning and Finance Committee from the Democratic Party of Korea, has announced legislation for the ‘National Crisis Overcoming Coexistence Fund’ and is planning to establish a fund to support self-employed individuals, business owners, unemployed persons, and essential workers who were severely affected by COVID-19. The funding sources include private contributions and donations, the recovery of public funds from the International Monetary Fund (IMF), and funds obtained by adjusting the Bank of Korea’s reserve ratio. At the full meeting of the Planning and Finance Committee the day before, Representative Yang stated, "We are preparing to secure funds by lowering the Bank of Korea’s reserve ratio to around 10%." Currently, the Bank of Korea sets aside 30% of its net income as a statutory reserve, with the remainder remitted to the national treasury.

There was also an opinion that the Bank of Korea should directly purchase government bonds issued by the government. The ‘Special Act on Compensation for Losses and Coexistence to Overcome the Coronavirus Infectious Disease,’ proposed by Min Byung-duk of the Democratic Party, includes provisions for issuing government bonds to cover compensation and consolation payments related to COVID-19, with the Bank of Korea directly underwriting these bonds in the issuance market. This effectively forces quantitative easing by the political sphere.

The Bank of Korea has expressed reluctance. In a business report the day before, Governor Lee Ju-yeol stated, "The option of the Bank of Korea directly underwriting government bonds is not desirable," adding, "It could raise concerns about fiscal soundness, damage trust in the central bank, and negatively affect external credit ratings." Regarding the reduction of the reserve ratio, Governor Lee responded, "It is indeed a cautious matter, but I will discuss it with the Monetary Policy Committee." Although the Bank of Korea has expressed opposition, if the ruling party pushes it through in the National Assembly where it holds the majority, the Bank of Korea has no way to block it.

The political sphere shaking the central bank is problematic because it could undermine the bank’s independence in the long term. It could also foster a culture of relying solely on the Bank of Korea whenever fiscal capacity reaches its limits. Park Hyung-soo, a member of the People Power Party, pointed out, "The Bank of Korea has the responsibility to operate independent monetary policy to achieve price stability and financial stability," adding, "The Bank of Korea should not be used as a policy tool." Professor Kim So-young of Seoul National University’s Department of Economics warned, "This could result in monetary policy being decided by parties other than the central bank," and "If independence is compromised, the value of the Korean won could decline, causing foreign investment funds to withdraw."

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