The Possibility of a Decline in the Value of the Korean Won: A Structural Issue, Not a Matter of Fear

Amid the recent weakness of the Korean won and rising exchange rates, a wide range of interpretations has emerged. Some dismiss the situation as a temporary consequence of global conditions, while others regard concerns as exaggerated crisis narratives. However, it is difficult to attribute the trajectory of the won solely to external factors when domestic structural issues have accumulated over a long period of time. The potential decline in the value of the won should not be viewed as a matter of fearmongering, but rather as a realistic issue that requires a comprehensive examination of fiscal policy, monetary policy, and economic structure.

Repeated Cash-Based Fiscal Spending and Inflationary Pressure

In recent years, South Korea’s fiscal management has increasingly relied on large-scale cash-based support measures under the banner of crisis response. While such policies may have produced short-term effects in stabilizing sentiment or stimulating consumption, they inevitably lead to an expansion of the money supply and rising inflationary pressure. Inflation is one of the most direct factors that erodes the value of a currency.

A more fundamental concern is that these fiscal expenditures were not sufficiently linked to productivity improvements or structural reform. Temporary financial support does little to strengthen economic fundamentals and instead sends a signal to the market that the government is willing to expand spending whenever pressure arises. Over time, this weakens confidence in the currency itself.

Rapid Growth of National Debt and Erosion of Fiscal Credibility

South Korea’s national debt has reached a level that raises concern not only due to its absolute size but also because of its rapid rate of increase. More important than the debt level itself is the credibility of fiscal management. When government finances appear to be driven by political considerations and short-term public sentiment rather than by long-term planning, confidence in the currency inevitably declines.

Global financial markets place greater emphasis on policy discipline than on raw numbers. How a country manages its debt and upholds fiscal principles during difficult times has a direct impact on currency valuation. A perception of weakened fiscal discipline can accelerate capital outflows and increase exchange rate volatility.

Policy Inconsistency and Declining External Trust

Exchange rates are not determined solely by supply and demand in the foreign exchange market. Policy consistency and predictability are equally important. When tariff policies, trade strategies, and industrial protection measures lack coherence and rely on short-term reactions, markets incorporate that uncertainty as risk.

In an era of global supply chain restructuring and rising protectionism, the absence of a clear and consistent trade strategy places additional pressure on the won. Exchange rates reflect not only economic performance but also a country’s overall policy credibility.

Changes in the Global Interest Rate Environment and Structural Vulnerabilities

Shifts in global interest rate policies—particularly those led by the United States—are an important external factor influencing the won. However, currencies do not respond uniformly to the same external conditions. Differences arise from variations in economic fundamentals.

Slowing growth momentum, accelerated population aging, and rigid labor market structures have accumulated as structural vulnerabilities. Under such conditions, interest rate differentials exert a stronger influence, reducing a country’s ability to defend its currency against external shocks. This affects not only short-term exchange rate movements but also longer-term currency valuation trends.

How Should the Possibility of a Decline in the Won Be Understood?

It would be premature to conclude that the Korean won is on the brink of an extreme collapse. South Korea continues to possess important defensive strengths, including a strong manufacturing base, export competitiveness, and substantial foreign exchange reserves. However, the direction of policy matters. When fiscal expansion, weakening monetary credibility, and policy inconsistency accumulate simultaneously, sustained downward pressure on the won becomes difficult to avoid.

This is not a scenario of sudden collapse, but rather a gradual erosion of trust. Currency value is shaped less by isolated events and more by long-term policy choices and institutional discipline.

Discussing the possibility of a decline in the value of the won is not intended to promote pessimism. Rather, it is an effort to examine the consequences of past policy decisions and to raise questions about the direction moving forward. A currency ultimately represents the condensed form of a nation’s credibility.

What is needed now is neither complacent optimism nor exaggerated fear. Restoring fiscal discipline, reassessing cash-based spending policies, ensuring policy consistency, and engaging in serious discussion about long-term growth strategies are essential. The future value of the Korean won will be determined by the sum of these choices.