NPS Mulls Raising Hedge Ratio Amid Won Weakness, But Yield Concerns Fuel Caution

The Ministry of Health and Welfare has begun reviewing legal amendments to allow the National Pension Service (NPS) to issue foreign currency-denominated bonds, as the won-dollar exchange rate remains stubbornly above the 1,470 won level despite authorities' intensified efforts to stabilize the currency. The prolonged weakness in the Korean won has heightened uncertainty in the Korean economy, prompting the ministry to seek countermeasures.

On December 8, the won closed at 1,466.9 won per dollar in the Seoul foreign exchange market, down 1.9 won from the previous trading day. Compared to other major currencies, the won remains in a weak position. Over the past week, the Dollar Index (DXY), which measures the dollar's value against six major currencies, fell on all days except December 4. During the same period, the yen strengthened 0.1% against the dollar, and the Chinese yuan rose 0.01%, while the won weakened 0.1%.

Market observers note that supply-demand imbalances persist as export companies are not selling sufficient dollar volumes while domestic investors maintain steady demand for foreign currency conversion. This dynamic continues to exert upward pressure on the won-dollar exchange rate. Allowing NPS to issue foreign currency bonds could contribute to stabilizing the foreign exchange market, according to market participants. Foreign currency bonds are debt securities issued overseas in currencies such as dollars or euros to raise foreign capital.

According to fund management disclosures, as of end-September, overseas stocks (508.2 trillion won) and overseas bonds (96.6 trillion won) accounted for 44.4% of NPS's total assets under management of 1,361.2 trillion won. Including alternative investments abroad, more than half of total assets are invested overseas. Given NPS's hundreds of trillions of won in overseas investments, the primary rationale for the legal amendment is to reduce dollar purchasing demand and promote foreign exchange market stability through direct foreign currency bond issuance. Some also argue that establishing an institutional framework for utilizing foreign currency bonds through legislative changes would be meaningful regardless of actual issuance, as it would expand policy options during periods of heightened foreign exchange market volatility.

The concerns, however, center on potential yield deterioration and expanded financial risks. Foreign currency bonds are liabilities requiring principal and interest repayment, which could significantly reduce NPS's returns. If global financial conditions worsen or interest rates rise, NPS's repayment burden could increase, amplifying uncertainty risks for the pension fund responsible for securing citizens' retirement income.

Despite these concerns, the government's decision to play the NPS card—effectively a last resort—is interpreted as an effort to lower the exchange rate and enhance macroeconomic stability. Experts generally agree that a weaker won inevitably has negative effects on the real economy. According to analyses by the Korea Development Institute (KDI) and the Bank of Korea, consumer prices rise by 0.03 to 0.04 percentage points for every 1% increase in the exchange rate. With living costs already running in the mid-2% range, additional upward pressure from exchange rates would reduce real incomes, particularly burdening low-income households.

There are also concerns that Korea's industrial structure—importing raw materials and intermediate goods for processing before export—means persistent won weakness directly translates to higher manufacturing costs and could erode corporate competitiveness.

However, concerns about mobilizing NPS continue to be raised both inside and outside the government. Critics question whether using NPS can actually strengthen the won in an economic environment where expansionary fiscal policy and investments toward the United States are structurally weakening the currency. Some in the foreign exchange market suggest creating incentives to bring corporate dollars back to Korea by expanding the tax exemption on overseas subsidiary dividends from 95% to 100%. "Given that expansionary fiscal policy is bound to deepen won weakness, mobilizing NPS for currency defense could become problematic down the road," a government official said.

Beyond foreign currency bond issuance, other exchange rate stabilization measures that NPS could implement are also under review. NPS and the Bank of Korea began discussions last month on extending their foreign exchange swap agreement, which expires at year-end with a total swap size of $65 billion. The swap arrangement absorbs NPS's spot currency purchasing demand and helps stabilize the foreign exchange market. While foreign exchange reserves decline by the transaction amount during the swap period, the funds are fully returned at maturity, making the reserves decrease temporary.

The market is also discussing raising NPS's currency hedging ratio. One proposal would increase strategic and tactical hedging to a maximum of 15%. In this case, if the exchange rate rises further, NPS's potential gains from currency appreciation would be limited. NPS is reportedly taking a negative stance on measures such as raising the hedging ratio.