1. Korea’s overseas investment has increased sharply in recent years, led by portfolio investment. In 2025, direct investment declined to USD 41.2 billion from USD 49.7 billion in 2024, whereas portfolio investment reached USD 140.3 billion, more than double the USD 67.0 billion recorded in 2024. As a result, the ratio of portfolio investment to GDP also rose sharply, from 3.6% (2024) to 7.5% (2025). The expansion of overseas investment leads to the accumulation of external assets and an increase in net external financial assets; over the long run this is positive in that it helps expand investment income receipts, enhance the buffer of foreign currency liquidity, and strengthen external payment capacity. At the same time, Korea’s recent portfolio investment has expanded somewhat steeply, with both its scale and its ratio to GDP overtaking those of Japan (USD 102.8 billion, 2.3% in 2025).
2. Korea’s investment income balance has remained in surplus since 2011, and its share within the current account has been expanding gradually. Whereas the past current account surplus was based mainly on the goods balance, the accumulated net external assets have, since 2020, helped diversify the sources of FX supply through an expansion of investment income inflows such as interest and dividends. However, an increase in investment income does not necessarily translate into a commensurate inflow into the domestic FX market. In particular, when earnings generated from direct investment are not paid out as dividends but are retained or reinvested in the host economy, a gap can arise between the statistical investment income surplus and the amount actually flowing into the FX market.
3. We examine how the future expansion of overseas investment, the resulting increase in investment income, and changes in the share of reinvested earnings affect the KRW/USD exchange rate, and draw policy implications. We first review the cases of Japan, Germany, and Taiwan, which—like Korea—followed a manufacturing-based, export-led growth path and accumulated external assets, leading to a current account structure in which investment income plays an important role. We then conduct empirical and scenario analyses using a Large Bayesian Vector Autoregression model to assess how overseas investment and investment income affect the KRW/USD exchange rate.
4. Japan, Germany, and Taiwan are all current account surplus economies, but the sources of their surpluses differ. Japan’s surplus is centered on the primary income balance, while Germany’s and Taiwan’s surpluses are driven mainly by the goods balance. In Japan, the share of the primary income balance in the current account began to rise from the mid-2000s. Today, Japan’s goods balance is in deficit, while a large primary income surplus continues to support the overall current account surplus. Korea, by contrast, still relies heavily on the goods balance. However, as the share of primary income increases, Korea appears to be moving from a goods balance centered current account structure toward one in which investment income plays a more important role.
5. (Japan) From an FX supply and demand perspective, Japan’s increased reliance on the primary income balance, together with a higher reinvestment ratio, appears to have constrained the domestic repatriation of investment income and contributed to yen weakness. Overseas investment in Japan and Korea has, with a time lag, shown similar developments in several respects. In Japan, from the early 1980s domestic interest rates declined gradually, and as overseas investment returns came to exceed domestic returns on a trend basis, the accumulation of external assets and the expansion of investment income took hold in earnest. In Korea as well, overseas investment returns have exceeded domestic returns since the mid-2000s, and since 2014 net external financial assets have moved into positive territory—developments resembling Japan’s past path.
This suggests that Korea, like Japan, is entering a stage in which the share of overseas investment rises—owing in part to declining domestic returns on capital—so that the importance of investment income in national income grows steadily. Moreover, if population aging accelerates and productivity growth continues to slow in Korea, the trend of expanding overseas investment may persist alongside a relative decline in domestic investment returns. In that case investment income could increase further, but if a larger share of that income is retained or reinvested abroad rather than repatriated, a mechanism similar to Japan’s may partly operate on the exchange rate as well.
6. (Germany) Germany’s reinvestment ratio, at around 28% (average since 2010), is considerably lower than Korea’s (40%) and Japan’s (46%). Germany’s low reinvestment ratio stems first from the ease of repatriating overseas earnings through holding companies established in tax-favorable jurisdictions, and from the strong incentive to use the repatriated profits for domestic investment. By contrast, Korea has recently shown a high share of local retention of the profits of overseas affiliates, which contrasts somewhat with Germany’s strong tendency to repatriate to the home country; this appears to reflect the strong need to build global supply chains in key industries such as automobiles, semiconductors, and secondary batteries.
7. (Taiwan) Although FX supply is ample, owing to a large goods balance surplus and a strong tendency to repatriate investment income, spot FX demand appears limited because institutional investors hedge a large share of their overseas investment. Taiwan’s reinvestment ratio is around 18%, lower than Korea’s, Japan’s, and Germany’s, and it has a strong tendency to actively repatriate overseas earnings in the form of dividend remittances. On the other hand, Taiwan’s overseas investment is conducted through portfolio investment rather than direct investment, and portfolio investment is largely currency-hedged, mainly by life insurers, so the expansion of overseas investment does not appear to stimulate spot FX demand.
8. We use a Large Bayesian Vector Autoregression (LBVAR) model to examine the effects of overseas investment and investment income on the KRW/USD exchange rate. The analysis identifies structural shocks through sign restrictions, conducts impulse-response analysis, and develops scenario analysis based on the expected movements of key variables.
9. The results show that an expansion of overseas investment, an FX demand factor, raises the KRW/USD rate, whereas an increase in investment income, an FX supply factor, lowers the rate. A shock to overseas investment, equivalent to an increase of about 3% relative to its average level, raises the KRW/USD rate by about 0.7 percentage point. By contrast, a shock to investment income, equivalent to an increase of about 8% relative to its average level, lowers the rate by about 0.4 percentage point. A 1 percentage point rise in the reinvestment ratio weakens this FX supply effect and generates upward pressure on the exchange rate, raising the rate by about 0.4 percentage point. Scenario analysis also shows that an expansion of overseas investment and a rise in the reinvestment ratio raise the exchange rate relative to the baseline projection, while an increase in investment income lowers it. These results suggest that when earnings generated abroad are not repatriated but retained or reinvested in the host economy, the FX supply effect of higher investment income is constrained, allowing upward pressure on the KRW/USD rate to persist.
10. Korea still relies heavily on the goods balance surplus, but as external assets accumulate and the importance of investment income grows, Korea appears to have entered a transitional phase in which the structure of the current account is gradually diversifying. That said, it is difficult to interpret this directly as a broadening of exchange rate stabilizing factors. The expansion of overseas investment entails FX demand and creates upward pressure on the KRW/USD rate, whereas the investment income generated from accumulated external assets increases FX supply and partly mitigates that pressure, creating a two-sided effect. In the end, the recent increase in investment income is meaningful as a buffer that complements the economy’s external payment capacity, but it may not directly translate into a stronger domestic growth base or into exchange rate stability.
11. Going forward, the investment income surplus is highly likely to expand over the medium term, supported by export growth centered on semiconductors and the accumulation of net external financial assets. However, this surplus trend is unlikely to act solely as a structural factor pushing the exchange rate down. If domestic productivity slowdown and population aging persist, firms’ incentive to invest abroad will continue, and—similar to the Japanese case—as the tendency to retain and reinvest abroad strengthens, the domestic repatriation of investment income may be more limited than expected.
12. The monitoring framework for FX supply and demand should be refined, focusing on how much of the investment income that grows with the expansion of overseas investment is actually repatriated into the domestic FX supply. In particular, since the impact on the FX market differs depending on dividends, reinvested earnings, currency hedging, and related channels, it is necessary to look not only at the scale of investment income but also at whether it is repatriated and at the propensity to retain it abroad. In addition, while promoting the domestic repatriation of dividends from overseas affiliates and encouraging stable currency hedging by institutional investors, more fundamentally it is necessary to raise domestic productivity and investment returns so as to ease the structural incentives for expanding overseas investment. Ultimately, medium- to long-term exchange rate stability cannot be achieved through FX market measures alone; it will be possible only if the basis for repatriating investment income is strengthened together with an enhancement of domestic growth potential.