In case you need a quick intro to this topic, Brad Setser wrote about the Korean situation here and here.
On to today's news. The plot thickens.
From Reuters:
SEOUL (Reuters) - South Korea's central bank will not seek to diversify currencies in its massive foreign exchange reserves away from the dollar because that would push the won higher, Yonhap news agency quoted the bank's chief as saying on Sunday.
Park Seung, Governor of the Bank of Korea, was also quoted as saying while visiting Japan that the won's rise was too fast and should not gain further.
He said he planned to discuss issues related to the foreign exchange reserves when he meets his Japanese and Chinese counterparts in Seoul on May 27, according to Yonhap.
"The exchange rate should not go down further," Park was quoted as telling reporters in Okinawa, where the Inter-American Development Bank (IADB) was holding its annual conference.
"The policy of seeking diversification in foreign reserves can push the exchange rate down further."
A currency dealer in Seoul said Park's remarks represented a dilemma facing South Korean foreign exchange authorities -- that they cannot afford to expand foreign reserves further amid domestic criticism about the costs of carrying reserves.
"I don't think it really means they are abandoning the diversification effort but the central bank wants to show the determination of authorities to slow the won's rise," said Park Yong-il, senior FX trader at DBS Bank branch in Seoul.
It's a dilemma, alright, as the first link to Setser's page (the more recent one) indicates. The words Scylla and Charybdis come to mind.
The article continues with a short but informative blurb on the reserve situation.
South Korea, Asia's third-largest economy, held reserves of $205.45 billion at the end of March, the fourth-largest holdings in the world. The reserves rose 26 percent over a year before, or some $42 billion, which dealers said mostly came from the central bank's direct intervention in the local currency market.
The rising cost of accumulating and holding reserves has emerged as a headache for Asia's central banks, which together hold more than $2.45 trillion of such assets.
The won has risen only about 2 percent so far this year against the dollar but it followed a 15 percent gain in 2004. Its rise was also in contrast to a drop of about 5 percent in Japan's yen against the dollar this year.
As a result, the won's value against the yen rose 7 percent this year to its highest level since the 1997-1998 Asian financial crisis.
Make no mistake, Korea does not want us to experience the hard landing scenario, and their ability to navigate these waters matters for how hard our landing is. Despite the fact that it looks less likely that Korea would massively sell off our debt, I can't exactly say that I'm flush with optimism over this news.
I agree. It seems as though they could change course abruptly at any time, though it does appear in their best interest to smooth whatever transition occurs.
In that sense, I suppose it's better for the central banks to hold the debt, as they can manage its disposition, than it would be if the private sector held it in which case the debt could change hands quicker.
With Korean macro policy, I think one has to bear in mind that the MOFE and BOK don't always seem to see eye-to-eye. Some of the more "political" statements (such as diversifying and even lending reserves to banks) seem to be coming from the MOFE, while the more moderate (and arguably more important) statements seem to come from the BOK, such as Park's comment over the weekend.
The statement about diversifying did originate from the Bank of Korea. However, according to Reuters article, the remarks were in a policy statement to the Korean parliament.
To use the analogy in my post, perhaps the MOFE and parliament are worried about Scylla (cost of carrying reserves) while the BOK is more concerned about Charybdis (currency appreciation).