South Korea has officially lifted a 14-year ban on domestic financial institutions purchasing kimchi bonds, a move aimed at attracting foreign currency inflows and stabilizing the won. The decision comes amid growing demand for dollar-backed stablecoins and increased retail investor activity in overseas markets, which have strained the country’s foreign exchange reserves.
The Bank of Korea (BoK) initially imposed the ban in 2011 over concerns that kimchi bonds—foreign-currency-denominated debt issued by domestic entities—could lead to currency mismatches among local issuers. However, with the won’s recent weakness and dwindling foreign currency liquidity, the central bank has reversed course to address these economic challenges.
“This measure is expected to contribute to resolving the imbalance in forex supply and demand by improving foreign currency liquidity conditions and easing pressure on the weak won,” the BoK stated.
Dollar-Backed Stablecoins Spark Speculative Frenzy Among Korean Investors
The surge in demand for dollar-backed stablecoins has created a frenzy among South Korean investors, who are increasingly turning to overseas stocks and cryptocurrency instruments. Reports indicate that trading in crypto assets hit 57 trillion won ($42 billion) in the first quarter of this year alone.
This speculative behavior has exacerbated the won’s depreciation, prompting the government to take drastic measures. In response, South Korea has implemented a series of reforms to deregulate its foreign exchange market and encourage foreign currency inflows. These include raising hedging limits in currency derivatives, easing restrictions on foreign currency lending by domestic banks, and expanding the forex swap line between the BoK and the National Pension Service.
The lifting of the kimchi bond ban is the latest step in this effort. By allowing domestic financial institutions to invest in these bonds, the government hopes to counterbalance the outflows caused by retail investors flocking to dollar-backed assets.
Won Strengthens Temporarily as Market Responds Positively
The won initially responded positively to the policy change, strengthening by 1.2% on Monday to reach 1,347 won per dollar, its highest level in eight months. However, it later retraced some gains, trading at 1,353 won per dollar.
The appointment of President Lee Jae-Myung earlier this year has also contributed to the won’s recovery, with the currency gaining approximately 8% against the dollar so far in 2025. This marks a welcome shift following last year’s martial law turmoil, which had weakened investor confidence.
The new administration has pledged higher fiscal spending, partly in response to pressure from Washington to boost the won’s value in trade talks. Analysts believe these efforts signal the government’s commitment to stabilizing the economy and opening up the forex market further.
Forex Reserves Hit Five-Year Low, Prompting Regulatory Reforms
South Korea’s forex reserves reportedly fell to their lowest level in five years in May, underscoring the urgency of the situation. To combat this decline, the government has taken several measures, including:
- Raising hedging limits in currency derivatives
- Easing restrictions on foreign currency lending by domestic banks
- Expanding the forex swap line between the BoK and the National Pension Service
These steps aim to reduce the state-run pension fund’s dollar-buying activities in the domestic market and improve overall liquidity.
The lifting of the kimchi bond ban aligns with these efforts, as it encourages foreign currency inflows. Before the ban was lifted, the primary issuers of kimchi bonds were foreign subsidiaries of South Korean companies seeking dollar funding. Now, analysts expect more domestic groups to issue these bonds, as they can sell foreign currency debt and convert it into won for domestic use.
Will Domestic Companies Rush to Issue Kimchi Bonds?
While the policy change is a significant step forward, some experts caution that domestic companies may not immediately rush to issue kimchi bonds. The higher funding costs associated with dollar-denominated debt compared to won-based financing could deter issuers.
However, Hwang Sei-woon, a senior research fellow at the Korea Capital Market Institute, highlights the broader implications of the move:
“There is increasing perception that the Korean won is too weak relative to its fundamentals, and the government wants the local currency to appreciate further.”
He added that the new measure not only signals higher long-term demand for the won but also reflects the government’s willingness to open up the forex market even more.
Conclusion
South Korea’s decision to lift the 14-year-old kimchi bond ban underscores its commitment to addressing the won’s weakness and stabilizing the economy. With foreign currency liquidity under pressure due to the rising popularity of dollar-backed stablecoins and overseas investments, the move aims to attract offsetting capital inflows and balance the forex market.
While challenges remain, such as convincing domestic companies to issue kimchi bonds despite higher funding costs, the policy change represents a proactive approach to managing South Korea’s economic vulnerabilities. As the government continues to implement reforms, the won’s trajectory and the success of these measures will be closely watched by both domestic and international stakeholders.
For now, the lifting of the ban serves as a clear signal that South Korea is ready to embrace a more open and dynamic forex market—one that could pave the way for greater stability and growth in the years ahead.
