Lee Changyong, after meeting Suka: "Price cap also fueled interest in Gangnam real estate... Raise property holding taxes and lower transaction taxes"

"Unclear whether the semiconductor supercycle will last 10 years"
Government should take a cautious approach to expansionary fiscal policy
Exchange rates are also a financial price variable
Fluctuations should be accepted unless there is a risk of national default
Households' overseas investment trend is expected to continue
National Pension Service should raise domestic investment share to 50%

Former Bank of Korea Governor Lee Chang-yong said the government should take a more cautious approach to expansionary fiscal policy at a time when the semiconductor supercycle has sharply boosted economic growth. He said risk management on spending is necessary when a tax revenue boom from a prolonged supercycle is not guaranteed. He also cited the fact that once the government substantially increases spending, it may have to spend even more the following year to support growth.

He said that, given that it is impossible to solve every real estate problem, the government should focus on its priority goals, raise property holding taxes and lower transaction taxes. He added that the price cap on new apartment sales may also have fueled greater interest in homes in Gangnam, and stressed the need for policy changes suited to current conditions.

Former Bank of Korea Governor Lee Chang-yong answers reporters' questions at a press conference following a monetary policy decision meeting at the BOK in Jung-gu, Seoul, on April 10. Photo by Joint Press Corps.

"It is unclear whether the semiconductor supercycle will last 10 years...Fiscal expansion requires caution"

Appearing on the YouTube channel Suka World on October 10, Lee said he had two concerns about expansionary fiscal policy at a time when the economic growth forecast exceeds 3%. "If we make large-scale investments because tax revenues are strong in 2026 and 2027, those investments will have to continue for 10 years, or at least five to six years. If, by some chance, substantial tax revenues come in for about two years and then dry up, long-term investment plans could be disrupted," he said, adding, "We need to manage the risks of spending over a 10-year period."

He also stressed that it is important to bear in mind that if the government increases spending one year and then spends less the following year, that could make a negative contribution to growth. "Growth is forecast at 3.3% in 2026 and 2.9% in 2027, and it could be even higher. Those rates are above our potential growth rate, which is just under 2%," he said. "We should consider whether we really need to spend more to push growth even higher. From the perspective of smoothing economic growth for the future, I think it would be better to take a somewhat more cautious approach."

"Semiconductors cannot solve every problem in our economy"

He said the semiconductor supercycle would not solve every problem in the Korean economy. "Nominal economic growth exceeded 21% in the first half of the year, and September's export figures suggest it could rise even further. In numerical terms, we have seen a growth rate not witnessed in several decades," Lee said. "But we have to consider that we do not know how long the current semiconductor boom will last."

"A year ago, when Samsung Electronics was unable to supply high-bandwidth memory (HBM) to Nvidia as effectively as SK hynix, I met with around 20 semiconductor experts in Korea over the course of a month to hear their views. Not one of them forecast that a supercycle was coming," he said. "Yet many of them now say the cycle will last 10 years, so honestly, I don't know whether to believe them."

Lee noted that "from a policymaker's perspective, even if the semiconductor cycle lasts another 10 years, there would be two concerns: how to manage the deepening industrial polarization caused by the economy's heavy reliance on the semiconductor industry, and whether the semiconductor cycle can really last that long." He said, "I don't think the semiconductor supercycle will lift Korea to a new level and solve all its economic problems. As an extreme example, the low birthrate and aging population problems that emerged after the era of growth-oriented policies will not be resolved just because the semiconductor industry is doing well. We need to look at these issues from other perspectives."

"The current cycle is partly due to the strong competitiveness of Samsung and SK hynix. But another reason China's semiconductor companies have slowed their catch-up is that, amid U.S.-China tensions, they have been unable to import lithography equipment from Dutch company ASML," he said, adding that "if circumstances change, the semiconductor industry's landscape could shift." He also said it was a concern whether Samsung and SK hynix could sustain operating profit margins of more than 70%. "Individuals and institutions may invest more based on optimism, but policymakers also need to prepare for the possibility that things may not go as hoped," Lee stressed.

"The exchange rate is a financial asset's price, like a stock price...It should be allowed to fluctuate unless there is a risk of national default"

He said the recent sharp drop in the exchange rate was the result of a large current account surplus being reflected in the currency market belatedly. "The current account surplus forecast for 2026 is $450 billion," he said, noting, "We have never experienced a current account surplus exceeding 20% of gross domestic product (GDP)." He explained that the exchange rate should have fallen after the semiconductor supercycle began in March, but the KOSPI rose more than threefold, surpassing 9,000 in a short period. As a result, overseas institutional investors who had exceeded their investment limits in Korea took profits and rebalanced their portfolios, pushing the exchange rate up instead. "How long the large current account surplus will last and how much faster U.S. interest rates will rise are variables for the exchange rate going forward," he said. "We should also keep an eye on the Trump administration's policies and tariff-related variables after the U.S. elections in November."

He said a shift in perspective was needed on exchange rate volatility. "If the exchange rate fluctuates as it did in 1997, that doesn't mean the country will default. We need to move beyond a framework shaped by our familiarity with the fixed exchange rate system of the past," he said. "If we react to every exchange rate fluctuation, it becomes extremely difficult to implement policy. We should think of the exchange rate as the price of a financial asset, like a stock price: the government should manage it only when there is a risk of national default, and otherwise let it fluctuate." He also said Korea should accept the exchange rate as a 'shock absorber' that fluctuates to some extent and cushions the impact when macroeconomic shocks occur. 

He cited two factors behind the recent rise in government bond yields in the United States and other major economies: higher oil prices due to the war in the Middle East, which could force the United States to raise interest rates to curb inflation; and the excessive growth of fiscal spending in the United States and other advanced economies over the medium to long term. "The dollar has held up thanks to the exceptional status it enjoys as the world's reserve currency. Any other country would already have faced enormous problems," he said, adding that "the rise in yields reflects investors' concerns about fiscal profligacy."

"The National Pension Service should bring its domestic investment share to around 50%"

Lee believes the National Pension Service should bring its domestic and overseas investment shares to around 50% each, as Japan has done. "Unless the K-Discount is addressed and Korea's stock market improves further on its own, the trend of households expanding their overseas investments will continue," he said. "But from the perspective of the national economy as a whole, sending money overseas is not desirable. It can contribute to the hollowing out of the domestic economy, among other problems." He added, "I think the National Pension Service, which manages individuals' savings, should help strike this balance," and said it may need to increase its domestic investment share further.

Lee said the Bank of Korea's research into structural reform of the Korean economy, which he focused on during his tenure, should continue. "I believe that excellent think tanks formerly under government ministries lost their neutrality as their leaders changed with every change of administration. I also think their credibility has weakened compared with the past. This is the result of the Korean government being heavily influenced by politics," he said. "Because the Bank of Korea's research is trusted to be politically neutral, I believe it is important for the Bank to continue its research on structural reform."

He repeatedly stressed that structural reform should be pursued consistently as a long-term policy, regardless of which administration is in power, through agreement between the ruling and opposition parties. "The real estate problem is connected to the concentration of people and resources in the Seoul metropolitan area, which is also linked to education. These issues take a considerable amount of time to address, but whenever administrations change in Korea, there seems to be a prevailing attitude among both the ruling and opposition parties that everything the previous government did was wrong and must be redone," he said. "Real estate tax policies have also changed so frequently with each change of administration that many people now think, 'Whatever tax policy is introduced, it will just change again when the administration changes.' That is why they have no effect," he said. "It is important to create an environment in which public officials can draw on their expertise and pursue structural reforms consistently until they produce results."

He again emphasized his longstanding belief that a small number of regions should be developed into counterweights to Seoul to ease the concentration of people and resources in the capital region. "Relocating state-owned enterprises for a second time would be meaningless if they were divided among a dozen or so locations, as happened with the Innovation Cities," he said. "Young people will not move to a region just because a particular industry is relocated there or more factories are built. Hospitals need to be built, and cultural infrastructure such as K-pop concert venues is also necessary. (But choosing the specific region to develop as a counterweight to Seoul) is politically one of the most difficult things to do."

"Raise property holding taxes and lower transaction taxes...The price cap on new apartment sales has also fueled interest in Gangnam"

On real estate tax policy, he said, "Personally, I think we should raise property holding taxes and lower transaction taxes." Some people will make money, but since it is practically impossible to achieve every goal, he said policy should focus on priority objectives, such as bringing more properties onto the market. He also said policies introduced with good intentions in the past should be reconsidered. "I think the price cap on new apartment sales has also contributed to the greater interest in homes in Gangnam," he said. A small number of people benefited from "lottery-style apartment sales," which in turn further stoked interest. Lee said, "Policy financing should target the poorest households, rather than ordinary citizens, and be provided on a limited scale. The rest should be directed toward stabilizing housing for ordinary people. (That is not the situation we are in now)." He said that even policies that were once meaningful need to change to suit current conditions.

He also stressed the need for labor market flexibility suited to the changing times. "There was a lot of controversy over the performance bonus systems at Samsung Electronics and SK hynix, and I found the debate at the time truly strange," he said. "Performance bonuses are distributed according to each person's contribution and performance. What incentive is there if they are divided equally among N people? If we don't change this framework, it will be very difficult for us to develop a new industrial structure and become an advanced economy."

Since leaving office, Lee has been working as a specially appointed professor at Seoul National University's Institute for Future Strategy and advising Yonsei University's Institute of Population and Human Resources. He is also a nonresident fellow at the Peterson Institute for International Economics, a U.S. think tank. "This year, I plan to give only special lectures at Seoul National University while preparing to teach a full course, and I hope to offer a course next year," he said. "It is a personal ambition of mine to earn a reputation as the person who knows the most about the Korean economy. I would also find it rewarding to give more presentations overseas."

This content was produced with the assistance of AI translation services.