South Korea’s finance minister said Monday that the government could carry out smoothing operations if the local currency fluctuates sharply against the U.S. dollar.
“If there are steep fluctuations in currency rates, our basic stance is that we could implement smoothing operations to ease the herd behavior in the market,” Finance Minister Bahk Jae-wan told reporters after a meeting with financial experts in Seoul.
But he cautioned that his remarks do not mean that the government will take any immediate action in that regard, saying, “It is tough to say that now is the time.”
The remarks were in response to questions about his take on the recent local currency market situation in which the won has appreciated significantly against the U.S. dollar.
South Korea’s won has gained 7.36 percent against the greenback since the start of this year, closing at 1,057 won on Friday.
The currency’s rise could help the government’s ongoing efforts to ease inflationary pressure by lowering import costs but it could also hurt exports, a key driving force behind the nation’s economic growth, by undermining price competitiveness in overseas markets.
Touching on other pending issues for the nation’s economy, Bahk singled out growing household debts and the troubled savings bank sector as possible factors that could weigh on the overall economic situation.
He also cited inflation as a risk factor. Bahk said that the government will work hard to ease the pace of price hikes after September, taking into consideration that pressure from the demand side still remains in place.
In the government’s latest economic management plan unveiled last month, he said that Seoul will place its top priority on price stability amid concerns that inflation could undercut the nation’s economic recovery.
The finance ministry revised down its growth projection for this year from 5 percent to 4.5 percent, while raising its inflation target from 3 percent to 4 percent.
Those revisions, however, spawned speculation that the government has changed its years-old growth-oriented economic policy.
In a forum held later with broadcast journalists, Bahk noted that the recent downward revision of the economic growth forecast does not amount to President Lee Myung-bak reneging on his campaign pledge to achieve 7 percent economic growth.
“We are not giving up on our objective of attaining 7 percent growth potential,” Bahk told the forum.
“Our growth potential stands at 4.5 percent, but there is room for us to raise the rate by 2 additional percentage points by establishing rule of law, improving our service sector, enhancing the nation’s productivity, easing social rifts and fostering cooperation with North Korea,” he added.
Regarding tax policies, the top economic policymaker placed more emphasis on slashing corporate taxes than income taxes, citing its higher rates compared to other member countries of the Organization for Economic Cooperation and Development.
His remarks come amid an ongoing debate over whether the government should go ahead with its plan to cut the nation’s income and corporate tax rates.
Opponents say that such tax cuts are intended to benefit large companies and wealthy people only, while supporters argue that the measure is necessary to boost consumption and corporate activities for higher economic growth.