Currency Circulation Rate Slowing

The amount of currency in circulation has decreased.

As domestic consumption has been showing a prolonged stagnation, fund demands from businesses have not been revived, and the credit status of households and small- and mid-sized companies have deteriorated, financial organizations have either reduced their loans or retrieved money they already loaned, resulting in a deepening “sclerosis of currency circulation” which is causing lower rates of currency circulation in the market.

According to the article in the “Currency Trends” published yesterday by the Ministry of Finance and Economy, the monetary base is counted as 35,700 billion won (interim), 0.1 percent lower year-on-year as of September 10, and 36,300 billion won (interim), 0.9 percent lower year-on year as of September 20.

If the downward trend continues to the end of this month, the monthly currency growth rate will turn negative for the first time in last five years since January 1999, when the rate was -8.7 percent during the foreign currency crisis.

The monetary base decreased -7.2 percent in 1998 and began to show double-digit growth rates again starting from 1999: up 12.1 percent in 1999, up 20.0 percent in 2000, up 11.5 percent in 2001, and up 14.3 percent in 2002. Last year, the rate was only up 6.5 percent due to the economic downturn.

In the beginning of this year, it seemed to increase, recording a rise of 9.6 percent in January, but growth has been slow ever since — up 4.0 percent in February, up 3.8 percent in April, up 4.3 percent in June, up 2.8 percent in August.

The Finance Ministry and the Bank of Korea explained that such a decrease in monetary base is mostly due to the technical effects of the decrease caused by this year’s Chuseok (Korea’s equivalent of Thanksgiving) holiday starting two weeks later than last year’s on September 10.

An official at the Bank of Korea said, “During the one-week period right before the Chuseok holiday, currency tends to be released more intensively. Because of this tendency, this year’s September, with Chuseok landing later than last year, recorded low currency-circulation rates compared to last year. Therefore, we will be able to see the correct data only at the end of this month.”

Nonetheless, financial experts see that even after considering the technical effects of the decrease, tightened credits due to the prolonged economic depression have contributed to a decrease in the monetary base that had been showing higher than average growth rates.

September 2002 and 2003 growth rates (both years had the Chuseok holiday on September) were 15.3 percent and 9.8 percent, respectively.

The M3, a currency index that shows the speed and the flow of the release of currency, grew only 5.9 percent (provisional) as of the end of September according to the article in the “Monthly Economic Trends” by the Finance Ministry. This growth rate is far behind last year’s average yearly growth rate of 8.8 percent.

Park Jae-ha, a senior researcher, said, “The M3 number shown typically indicates the existence of “sclerosis of currency circulation. Such a rapid decline in the level of M3 can be seen as a reflection of the current long-term economic depression.”

(Monetary Base: The total amount of bills and coins issued by the Bank of Korea, usually the combined total of currency held by individuals and firms and bank reserves kept within a bank or on deposit at the central bank.)

Chi-Young Shin Seung-Jin Kim higgledy@donga.com sarafina@donga.com