The market expectations for BOK rate cuts have increased after the Bank of Japan introduced negative rates last Friday. The spread between the 1Y KRW IRS and its benchmark has widened notably to -15bps on 1st Feb from -7.5bps on 28th Jan. Concerns came from the appreciation of the KRW versus the JPY, which is perceived to threaten Korea's exports competitiveness and the overall growth outlook. 

The rise in KRW/JPY was driven by the temporary improvement in global risk sentiment after the BOJ's unexpected policy easing on Friday. But the situation remains fluid. Still there is a high degree of uncertainties surrounding the emerging market outlook, given China's slowdown, sinking oil prices and higher USD financing costs. If global risk appetite were to deteriorate again, the KRW would react negatively.

At this point the growth and inflation outlook in Korea doesn't warrant a rate cut. The domestic demand is slowing after a strong rise in 2H15, but only gradually. Despite the downward pressure on nominal exports and headline CPI resulting from commodity price declines, real exports and core CPI have been holding up relatively well. 

"Judging from the macro conditions, the rate-cut expectations might be premature, in our view", notes DBS Group Research.