By Kim Bo-eun
Concerns are growing that Korea will follow in the footsteps of Japan ― a country that has suffered a decades-long deflation ― with low inflation coincident with slowing growth amid sagging exports and investment. Experts warn that without structural reform, it is inevitable that Asia's fourth-largest economy will fall into the deflationary trap.
While the majority of them stated that the country's circumstances differ from those of Japan that preceded its extended period of stagnation, they agreed Korea needs to take preparatory measures by enlarging its workforce and accelerating innovation.
The Korea Times questioned five global economic experts on their views on Korea's situation compared with Japan's 20 years ago, and the measures that need to be taken. They are Loyola Marymount University professor of finance and economics Sohn Sung-won; Shanghai-based independent economist specializing in Asia, Andy Xie; Korea Economic Institute of America's senior director Troy Stangarone, based in Washington D.C.; Wharton School of the University of Pennsylvania professor Mauro Guillen; and Natixis chief economist for Asia Pacific, Alicia Garcia-Herrero, in Hong Kong.
The following discussion has been reconstituted based on separate interviews, which were conducted from Sept. 9 through 14. ― ED.
1. There are views that Korea's situation is comparable to that of Japan that led to the latter's "lost 20 years." What is your take?
Sohn Sung-won: There are some similarities. Prior to the bubble bursting around 1990, Japan had excessive real-estate speculation and monetary-policy mistakes. At the time speculation in real estate drove prices so high that the value of the imperial palace ground in Tokyo was worth more than the entire state of California. After the bubble ended, the prices of homes in the Tokyo area fell as much as 80 percent from their peak. In Korea, the prices of real estate have gone up very rapidly driven in part by speculation. There is a possibility that a bubble is forming in Korean real estate. Demographics is another factor affecting both countries.
Alicia Garcia-Herrero: I believe Korea's situation is similar to that of Japan regarding aging, but the difference is that Korea's situation is more related to the international situation which is pushing interest rates down with deflationary pressures.
Troy Stangarone: In terms of economic growth and inflation, Korea has diverged from Japan at a similar point. Korea has also been able to avoid the types of asset bubbles that ultimately led to stagnation in the Japanese economy. The Japanese economy is also much less dependent on international trade than South Korea.
Mauro Guillen: What's different between Korea today and Japan since the 1980s is that the banks are not saddled with bad debts to the same extent. Also Japan had political paralysis.
2. What can we learn from Japan's situation?
Stangarone: Looking back at Japan's experience, after the collapse of asset prices it didn't force insolvent banks to either close or write down bad loans. It also allowed itself to get trapped in a period of low inflation. One of the key lessons is to quickly write down bad loans and recapitalize banks in a banking crisis. While the focus in Japan has often been on the banking system, the same can be said for firms. Struggling firms should not be allowed to continue indefinitely through the aid of low cost loans, but rather should be required to undertake restructuring if loans are to continue. Allowing zombie firms to stay afloat lessens the capital and workers available to more productive firms. Japan also worked to increase the participation of women in the workforce and open itself up to more international competition.
Guillen: It's important that Korea ensures its banking system is in good shape and its political system is fluid and adaptive to change.
Sohn: Monetary policy mistakes were a crucial factor contributing to the lost decade or lost quarter century for Japan. The Bank of Japan provided too much liquidity creating the debt and real-estate bubble. Then, realizing its mistakes, the Bank of Japan hiked the interest rate too high too fast. In hindsight, the Bank of Japan should have limited the amount of liquidity it provided to the economy in the earlier stages and refrained from raising the interest rate too high once it realized its earlier errors. In short the Bank of Japan's timing was terrible. The Bank of Korea could be making similar monetary policy mistakes. It has kept the interest rate higher than it should have over the past couple of years contributing to the current economic slowdown. Given the poor economic conditions and outlook in Korea, the central bank is not cutting the interest rate fast enough. Since monetary policy works with a substantial lag, timing is crucial. The Bank of Korea has timed its policy poorly so far.
Garcia-Herrero: We should learn from Japan's experience that it is very hard to move away from deflation and negative rates and you certainly need a boost in population.
3. What measures do you think Korea needs to take to prevent a long period of economic stagnation?
Sohn: The Moon government has launched a fiscal stimulus program and the Bank of Korea should support the fiscal policy by cutting the interest rate more aggressively lest it becomes another Japan.
Stangarone: Korea has taken more steps to open itself up to international competition than Japan through its FTAs, but needs to do more in the area of introducing international standards to make Korea a more attractive market and help prepare firms to better compete abroad. However, increasing the participation of women in the workforce may be the most important step in offsetting Korea's declining workforce. According to a study by the IMF, if Korea can increase the participation of women in the workforce to the same rate as other advanced economies by 2035 it would add 4 percent to GDP. If Korea is able to raise female labor force participation to the same rate as men in South Korea, it could add 7 percent.
Andy Xie: When a society is aging, its savings rate tends to rise. When it is aged, it declines. A society can save more only if it invests more or runs a trade surplus. The former is possible when it is increasing in competitiveness and, hence, more investment opportunity. Otherwise, running a trade surplus is the only way. When people are reluctant to hold foreign assets, the conflict will keep the currency high, which leads to deflation. To avoid deflation, Korea needs to innovate and discover new competitiveness. That would increase investment and keep the won stable.
Guillen: It is important to think about how to make the most out of the change also by enabling people in their 60s and 70s to continue working in some capacity, and creating a consumer economy that sees opportunities in the market for goods and services for people over 60 years of age. Some immigration may also be needed to rebalance the age pyramid.
Garcia-Herrero: Korea should open much faster to immigration (possibly targeted to the sectors where the supply of labor is more constrained). Of course, increasing competition across sectors would also be key. Foreign competition is very important for this as well as antitrust rules.
Stangarone: In addition to the steps that Japan has taken to restore economic growth, South Korea should consider raising its retirement age. With South Koreans living longer and more able to continue to contribute economically, raising the retirement age would help to slow the decline in the workforce and help to address issues with old age poverty.
Concerns are growing that Korea will follow in the footsteps of Japan ― a country that has suffered a decades-long deflation ― with low inflation coincident with slowing growth amid sagging exports and investment. Experts warn that without structural reform, it is inevitable that Asia's fourth-largest economy will fall into the deflationary trap.
While the majority of them stated that the country's circumstances differ from those of Japan that preceded its extended period of stagnation, they agreed Korea needs to take preparatory measures by enlarging its workforce and accelerating innovation.
The Korea Times questioned five global economic experts on their views on Korea's situation compared with Japan's 20 years ago, and the measures that need to be taken. They are Loyola Marymount University professor of finance and economics Sohn Sung-won; Shanghai-based independent economist specializing in Asia, Andy Xie; Korea Economic Institute of America's senior director Troy Stangarone, based in Washington D.C.; Wharton School of the University of Pennsylvania professor Mauro Guillen; and Natixis chief economist for Asia Pacific, Alicia Garcia-Herrero, in Hong Kong.
The following discussion has been reconstituted based on separate interviews, which were conducted from Sept. 9 through 14. ― ED.
1. There are views that Korea's situation is comparable to that of Japan that led to the latter's "lost 20 years." What is your take?
 |
| Sohn Sung-won |
Alicia Garcia-Herrero: I believe Korea's situation is similar to that of Japan regarding aging, but the difference is that Korea's situation is more related to the international situation which is pushing interest rates down with deflationary pressures.
Troy Stangarone: In terms of economic growth and inflation, Korea has diverged from Japan at a similar point. Korea has also been able to avoid the types of asset bubbles that ultimately led to stagnation in the Japanese economy. The Japanese economy is also much less dependent on international trade than South Korea.
 |
| Troy Stangarone |
2. What can we learn from Japan's situation?
Stangarone: Looking back at Japan's experience, after the collapse of asset prices it didn't force insolvent banks to either close or write down bad loans. It also allowed itself to get trapped in a period of low inflation. One of the key lessons is to quickly write down bad loans and recapitalize banks in a banking crisis. While the focus in Japan has often been on the banking system, the same can be said for firms. Struggling firms should not be allowed to continue indefinitely through the aid of low cost loans, but rather should be required to undertake restructuring if loans are to continue. Allowing zombie firms to stay afloat lessens the capital and workers available to more productive firms. Japan also worked to increase the participation of women in the workforce and open itself up to more international competition.
 |
| Mauro Guillen |
Sohn: Monetary policy mistakes were a crucial factor contributing to the lost decade or lost quarter century for Japan. The Bank of Japan provided too much liquidity creating the debt and real-estate bubble. Then, realizing its mistakes, the Bank of Japan hiked the interest rate too high too fast. In hindsight, the Bank of Japan should have limited the amount of liquidity it provided to the economy in the earlier stages and refrained from raising the interest rate too high once it realized its earlier errors. In short the Bank of Japan's timing was terrible. The Bank of Korea could be making similar monetary policy mistakes. It has kept the interest rate higher than it should have over the past couple of years contributing to the current economic slowdown. Given the poor economic conditions and outlook in Korea, the central bank is not cutting the interest rate fast enough. Since monetary policy works with a substantial lag, timing is crucial. The Bank of Korea has timed its policy poorly so far.
Garcia-Herrero: We should learn from Japan's experience that it is very hard to move away from deflation and negative rates and you certainly need a boost in population.
3. What measures do you think Korea needs to take to prevent a long period of economic stagnation?
 |
| Andy Xie |
Stangarone: Korea has taken more steps to open itself up to international competition than Japan through its FTAs, but needs to do more in the area of introducing international standards to make Korea a more attractive market and help prepare firms to better compete abroad. However, increasing the participation of women in the workforce may be the most important step in offsetting Korea's declining workforce. According to a study by the IMF, if Korea can increase the participation of women in the workforce to the same rate as other advanced economies by 2035 it would add 4 percent to GDP. If Korea is able to raise female labor force participation to the same rate as men in South Korea, it could add 7 percent.
 |
| Alicia Garcia-Herrero |
Guillen: It is important to think about how to make the most out of the change also by enabling people in their 60s and 70s to continue working in some capacity, and creating a consumer economy that sees opportunities in the market for goods and services for people over 60 years of age. Some immigration may also be needed to rebalance the age pyramid.
Garcia-Herrero: Korea should open much faster to immigration (possibly targeted to the sectors where the supply of labor is more constrained). Of course, increasing competition across sectors would also be key. Foreign competition is very important for this as well as antitrust rules.
Stangarone: In addition to the steps that Japan has taken to restore economic growth, South Korea should consider raising its retirement age. With South Koreans living longer and more able to continue to contribute economically, raising the retirement age would help to slow the decline in the workforce and help to address issues with old age poverty.
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