Taiwan’s Economic Boom Faces Hidden Vulnerabilities from Persistent Weak Currency Policy

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A Prosperous Economy Confronts its Fragile Foundations

TAIPEI — Taiwan’s rapid economic rise has been a global success story, driven by innovation, relentless export growth, and its unrivaled position in the semiconductor industry. Yet beneath the surface of booming GDP numbers and trade surpluses lies a deep structural imbalance that threatens to undercut the island’s long-term prosperity. Economists and analysts are sounding alarms over Taiwan’s decades-long policy of maintaining an undervalued New Taiwan Dollar (TWD), a strategy that once propelled the island’s "Asian Tiger" economy but now weighs heavily on domestic consumption, income distribution, and financial stability.

For more than thirty years, the Central Bank of the Republic of China (CBC) has persistently intervened in foreign exchange markets, seeking to keep the TWD weak against global currencies. This policy, originally aimed at supporting exporters and shielding the economy from external shocks, has succeeded in preserving Taiwan’s global manufacturing competitiveness. However, it has also created distortions in wage growth, household wealth, and investment patterns that increasingly resemble the pitfalls of an economy running on outdated assumptions.

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The Legacy of Taiwan’s Export-Led Miracle

In the 1980s and 1990s, Taiwan’s manufacturing miracle was underpinned by its ability to produce high-quality, low-cost goods for global markets. Machinery, electronics, and later semiconductors became the pillars of an export-driven growth model that transformed the island from a low-income agrarian society into a high-tech powerhouse. Policymakers maintained tight control over the currency to ensure exporters could price their goods competitively abroad.

After the 1997 Asian financial crisis, Taiwan’s conservative monetary stance insulated it from the turmoil that swept through neighboring economies. With foreign exchange reserves rising and inflation kept under control, the strategy appeared vindicated. Yet over time, the persistent undervaluation of the currency—coupled with subdued domestic demand—has created new challenges as the structure of Taiwan’s economy has matured.

Today, with per capita output surpassing that of Japan and nearing levels in advanced nations, the rationale for maintaining a weak currency is increasingly in question. The policy that once fueled industrialization now acts as a drag on the living standards of ordinary Taiwanese.

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Wage Stagnation Amid Productivity Growth

Despite enormous gains in output and technological sophistication, Taiwan’s wage growth has lagged far behind productivity. Since 1998, labor productivity has nearly doubled, but real wages have barely budged, eroding household purchasing power and widening the inequality gap. Unit labor costs have fallen by more than a quarter, reflecting an economy where efficiency gains are not translating into higher incomes for workers.

Analysts point to the weak currency as a silent contributor. By keeping the TWD artificially cheap, exporters have retained an advantage abroad while suppressing the real value of wages at home. The benefits of this regime accrue disproportionately to large manufacturers and corporate shareholders, whose profits swell as export revenues convert favorably into local currency. Meanwhile, the cost of imported goods—from fuel to everyday consumer items—remains elevated, hitting middle- and lower-income households hardest.

This imbalance has eroded consumer confidence and spending power, limiting the scope for a transition toward a more consumption-driven economy. For an economy as advanced and globally integrated as Taiwan’s, the continued dependence on export-led growth exposes a fundamental vulnerability.

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Flooded Liquidity and the Rise of Asset Bubbles

The exchange-rate policy has also had profound implications for Taiwan’s financial system. Decades of foreign exchange intervention have built up colossal reserves, now nearing $600 billion—the fifth-largest globally. To sterilize these inflows, the CBC issues bonds and adjusts domestic liquidity levels. Nevertheless, the long-term trend has been one of exceptionally low interest rates and abundant liquidity.

Since the late 1990s, average interest rates have fallen from around 8 percent to below 2 percent. While this has lowered borrowing costs, it has also fueled excessive speculation in real estate and distorted investment incentives. Property prices, particularly in the capital, have soared to some of the highest levels worldwide. In Taipei, the median house-price-to-income ratio now exceeds 16, outpacing ratios in global financial centers such as London, New York, and Seoul.

This surge has created a widening gap between asset owners and renters, intensifying intergenerational inequality and stoking social frustration among younger Taiwanese. Many professionals now find homeownership an unattainable dream, despite working in one of the world’s most advanced economies.

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A Current Account Surplus That Signals Dependence

Taiwan’s persistent current account surplus—hovering around 16 percent of GDP—underscores the economy’s ongoing overreliance on external demand. While such surpluses are often viewed as signs of macroeconomic strength, they can also indicate suppressed domestic consumption and investment imbalances.

This dependence on exports leaves Taiwan highly exposed to shifts in the global trading environment. Potential policy changes in the United States, such as new tariffs or reshoring incentives under a future administration, could disrupt demand for Taiwanese electronics and intermediate goods. Likewise, the spread of regional supply chain diversification to Southeast Asia could gradually weaken the island’s export grip.

With semiconductors accounting for over a third of total exports, even minor disruptions to global tech demand can ripple through Taiwan’s broader economy. A more balanced growth model—one that promotes innovation-driven services, digital transformation, and domestic consumption—may be essential to reduce such risks.

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Financial and External Vulnerabilities

Taiwan’s vast foreign reserves and ongoing capital inflows have also created substantial hidden risks. Analysts estimate that unhedged foreign currency exposures among financial institutions and corporates now exceed $200 billion, roughly a quarter of Taiwan’s GDP. Should the TWD appreciate suddenly—due to external shocks or policy shifts—the resulting balance-sheet losses could destabilize the financial system.

Moreover, Taiwan’s monetary tools remain constrained by its external posture. Unlike larger economies with deep capital markets and flexible fiscal frameworks, Taiwan’s financial system lacks the institutional buffers to absorb rapid adjustments. A sharp currency revaluation could therefore trigger unpredictable consequences in an economy where the export sector exerts an outsized influence.

Geopolitical uncertainty adds another layer of fragility. Heightened regional tensions or disruptions in cross-strait trade could worsen external imbalances, while a flight to safety among investors might force the CBC into difficult trade-offs between currency stability, inflation control, and growth.

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The Debate Over Reform

In recent years, policymakers and scholars have begun revisiting the sustainability of Taiwan’s export-centric model. Proponents of reform argue for gradual currency appreciation, which could stimulate domestic consumption by raising real incomes and lowering import prices. Others advocate for structural measures—such as improving wage bargaining mechanisms, expanding social safety nets, and encouraging innovation in non-tradable sectors—to ensure that economic gains are more evenly distributed.

The CBC, however, has defended its cautious approach. Officials highlight the benefits of currency stability in maintaining Taiwan’s competitiveness and insulating the economy from volatile capital flows. They point to Taiwan’s low inflation rate and consistent macroeconomic stability as evidence that their interventionist stance has served the island well through multiple global crises, including the 2008 financial crash and the COVID-19 pandemic.

Still, critics contend that maintaining this approach too long risks locking Taiwan into a development trap—one where growth persists, but real prosperity stagnates.

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Regional Comparisons and Lessons

Taiwan’s situation stands in contrast to that of other advanced East Asian economies that have gradually allowed their currencies to appreciate alongside economic maturation. South Korea, for example, has pursued a less interventionist foreign exchange policy since the early 2000s, supporting a steady rise in real wages and stronger consumer spending. Japan, after decades of yen appreciation, has faced its own deflationary challenges but has leveraged a robust domestic capital market and advanced service sector to maintain high living standards.

Singapore presents another instructive comparison. While also export-oriented, the city-state manages its currency within a policy band that targets inflation and productivity growth rather than exports alone. This has helped align monetary policy more closely with domestic economic conditions—an approach some Taiwanese economists believe could serve as a blueprint for reform.

Each case underscores the eventual limits of sustained currency suppression. As economies mature and living standards rise, success increasingly depends on innovation, productivity-driven growth, and internal demand rather than external price competitiveness.

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Global Implications of Taiwan’s Balancing Act

Given Taiwan’s central role in global technology supply chains, particularly as the dominant producer of advanced semiconductors, its monetary decisions carry implications far beyond its borders. The island’s stability underpins industries spanning from smartphones to electric vehicles and supercomputers. A currency shock or domestic financial crisis could reverberate across global markets, disrupting production schedules and triggering price volatility in high-tech sectors.

Foreign investors closely watch developments in Taiwan for signs of policy recalibration. Greater exchange rate flexibility would signal a maturing economy ready to embrace balanced growth, while prolonged intervention could heighten perceptions of systemic risk, especially amid growing global scrutiny of currency practices.

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A Critical Juncture for the Future

As Taiwan looks toward the next stage of its economic transformation, its leaders face a crucial choice: sustain an export-driven growth model anchored in a weak currency, or pivot toward a more resilient, consumption-oriented economy that reflects its advanced industrial status. The transition may carry short-term risks but also immense long-term rewards—a stronger middle class, greater financial stability, and a more balanced growth trajectory.

For now, Taiwan walks a narrow policy tightrope. The same dynamics that powered its remarkable rise—manufacturing excellence, global integration, and monetary prudence—now challenge its ability to evolve. The coming years will determine whether the island can adapt its economic framework to meet the expectations of a prosperous, globally connected society without undermining the foundation that built it.