Won Weakness and Demographic Winds: South Korea's Policy Dilemmas

Executive Summary

South Korea’s economy faces a convergence of challenges that test its policy agility: a rapidly depreciating currency colliding with structural demographic shifts, contradictory debt management strategies, and unresolved tensions between climate commitments and implementation. From the won’s slide toward 1,400 per dollar to the explosive growth of testamentary trusts amid aging populations, these developments reveal an economy navigating competing priorities in an era of global volatility. The stakes involve financial stability, intergenerational equity, and Seoul’s capacity to balance short-term crises with long-term reforms.

The Currency Conundrum: Strategic Hedging Withdrawal Meets Trump’s Tariff Turbulence

The won’s 3.3% depreciation against the dollar in July 2025 – breaching 1,390 for the first time since early 2023 – underscores South Korea’s vulnerability to asymmetric external shocks. Two forces dominate: renewed U.S. protectionism under President Trump’s tariff escalations and the National Pension Service’s (NPS) termination of currency hedging programs that previously stabilized exchange rates. With the NPS shifting to net dollar purchases (₩50 trillion slated for overseas investments in 2025), its role as a "safety plate" against won volatility has evaporated. This comes as tariff-induced inflation fears strengthen the dollar’s safe-haven appeal, creating a feedback loop that could push the won beyond 1,400 – a threshold likely to trigger costly central bank interventions.

The Debt Management Paradox: Tightening Screws While Flooding Policy Credit

Authorities’ attempts to curb household debt growth through stricter DSR regulations (capping repayments at 40-50% of income) clash with a parallel expansion of policy-driven housing finance. Public institutions have pumped ₩655 trillion into housing markets since 2019, with balances hitting ₩1,974 trillion in 2024. This contradiction is stark: while commercial banks face tightened loan-to-value ratios, state-backed lenders exempt 45% of housing loans from DSR rules. The result? Policy mortgages now account for 46% of total household debt, creating systemic risks as real estate markets cool. The Bank of Korea warns that applying DSR to policy loans could reduce debt growth by 5.6 percentage points – a reform delayed by fears of political backlash over housing affordability.”

Silver Tsunami Reshapes Finance: Testamentary Trusts Boom in an Aging Society

Demographic shifts are rewriting South Korea’s financial playbook. Testamentary trusts – allowing asset transfers bypassing inheritance disputes – have grown 4.3x since 2020 to ₩3.77 trillion, with minimum investments plunging from ₩1 billion to ₩10 million. This reflects two trends: single-person households (41% projected by 2050) seeking non-familial inheritance solutions, and asset-rich seniors (80% holding real estate) managing dementia risks. Yet regulatory gaps persist: trusts face 10-50% inheritance taxes without exemptions, and non-guaranteed investments risk eroding beneficiaries’ payouts. As securities firms join banks in this ₩44 trillion inheritance market, policymakers must balance innovation against consumer protection in a graying society.

Taxation Crosscurrents: Securities Levies and the Ghost of Fiscal Shortfalls

The proposed reversal of securities transaction tax cuts – from 0.15% back toward 0.25% – highlights fiscal pressures from dwindling revenues (₩4.8 trillion in 2024 vs. ₩10.3 trillion in 2021). This U-turn, driven by the failed financial investment tax experiment, risks alienating retail investors who dominate Korea’s stock markets. More problematic is the anachronistic 0.15% agricultural surcharge on stock trades – a relic of 1994 Uruguay Round compromises. Critics argue this “cause-less tax” distorts capital markets while subsidizing unrelated sectors, yet reform faces resistance from farming lobbies. The dilemma: raising transaction taxes could dampen equity market vitality while maintaining them strains fiscal credibility.

Climate Policy’s Implementation Gap: Private Burden, Public Inaction

South Korea’s 2030 NDC targets – requiring 37.5 million tons of CO₂ reductions via international projects – remain unmet, despite ₩154.5 allocated since 2023. While private industry reduced emissions by 8.9-18.5% since 2018, government inaction on cross-border carbon credits (stalled by Paris Agreement delays) risks missing targets. This imbalance – privatizing climate costs while delaying public investments – threatens both decarbonization timelines and industrial competitiveness, particularly as U.S. and EU carbon border taxes loom.

Conclusion: Navigating the Policy Trilemma

South Korea’s economic trajectory hinges on resolving a trilemma: stabilizing currency markets without stifling growth, managing demographic headwinds while containing debt risks, and aligning climate rhetoric with actionable investments. Short-term pressures – defending the won’s slide, curbing household leverage – may conflict with structural reforms needed for aging and decarbonization. The Yoon administration’s a delicate dance: leveraging fiscal tools (from consumption coupons to trust regulations) while avoiding overreach that could destabilize markets. With corporate defaults rising and tariff wars intensifying, 2025-26 will test whether Seoul’sustain its high-wire act between crisis management and long-term resilience.