South Korea Faces Risk of Japan-Like Lost Decade: William Pesek
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By William Pesek
Nov. 14 (Bloomberg) -- When it comes to Asian economies, so much can change in a year, never mind five. Look no further than comparisons between Japan and South Korea back in 2001.
Then, the talk was all about what Japan, Asia's biggest economy, could learn from Korea, the region's third-largest. Korea had risen quickly from the ashes of the Asian financial crisis, while Japan was stuck in deflation.
Today, it's hard not to wonder if the two have reversed positions: Japan is on the mend, while Korea is walking in place.
It may seem an odd suggestion, given that Korea is expected to grow 5 percent this year and Japan is seen advancing at half that rate. Korea's Kospi index is up 9.4 percent in dollar terms this year, while Japan's Nikkei 225 Stock Average has barely gained. The won is up 8 percent, while the yen is unchanged.
For an economy used to growing 8 percent or 10 percent, a slowdown to 4 percent can seem like a recession. And for all its attractive features -- an educated, hard-working labor force, a stable of globally competitive companies, a history of adapting to change -- Korea is awkwardly wedged between high-tech Japan and low-cost China. It means Korea needs to work extra hard to remain relevant in Asia.
The upshot is that Korea's $793 billion economy is being squeezed and challenged as never before. North Korea's unpredictable regime and nuclear ambitions certainly don't help.
Impressive Revival
There's plenty of interest in Korea, and rightfully so, given its track record of overcoming adversity. Traveling around Asia -- or in the U.S. and Europe -- Korea is often among the first markets to come up in conversation with investors, business people and economic policy makers.
Korea bounced back impressively from the 1997-1998 Asian crisis, prompting many economists to conclude that Japan could learn from officials in Seoul. Korea had cleaned up the bad loans in its banking sector, reduced public debt and engineered an influx of capital that helped reinvigorate the economy -- all things that Japan still needed to do in 2001.
By the end of 1999, the won had rebounded 37 percent from its Asian-crisis low. Gross domestic product, which shrank 6.9 percent in 1998, expanded 9.5 percent in 1999 and 8.5 percent in 2000.
Even though growth slowed to 3.8 percent in 2001, Korea avoided the recessions that hit neighbors such as Japan and Taiwan when the U.S. economy faltered. Growth accelerated anew to 7 percent in 2002 and the Kospi gained 145 percent from 1999 through 2005.
Japan-Like Woes?
Things look very different now. China is booming, Japan is growing again and Korea is about to slow just as it craves a bigger role in Asia's rise. Worse, the combination of a strong won, high oil prices and excessive property speculation may put Korea at risk for the kind of funk Japan suffered in the 1990s.
The danger has been mentioned sporadically over the last couple of years. ``We can't rule out the Japan experience unless we contain these problems,'' Kim Yong Duk, Korea's deputy finance minister from 1999 to 2001, told Bloomberg in June.
Finance Minister Kwon Okyu yesterday said Korea's housing market isn't facing an asset-price ``bubble.'' Yet Bank of Korea Governor Lee Seong Tae said last week the recent surge in home prices is ``worrisome.'' In October alone, nationwide apartment prices climbed 1.5 percent from the previous month, the largest gain since October 2003.
A sudden collapse in property values could take the economy down with them. It would come at a time when China is trying to slow growth and U.S. demand is expected to cool.
Daunting Challenges
Even economists who doubt that Korea will go down the Japanese path agree its challenges are daunting.
``Structurally, Korea has moved away from slipping into Japan syndrome over the past five years, but it's still on thin ice,'' says Andy Xie, an independent economist based in Hong Kong. ``China is upgrading also. Korea will never have a cost advantage over China. It has to stay ahead of China's electronics and autos constantly.''
Perhaps the biggest risk is policy paralysis. In office since February 2003, President Roh Moo Hyun gets poor marks on the economy. Low approval ratings and infighting before a December 2007 election mean Roh's government won't be as attuned to boosting business and consumer confidence as it needs to be.
Even if Korea's growth slows to 4 percent in the months ahead, that's a healthy rate compared with the seven largest industrialized economies. Four percent-plus growth provides a window of opportunity to push through upgrades that could raise living standards and attract foreign investors.
Big `If'
Japan hasn't suddenly become a role model for Korea. Japan is still more about job protection than job creation, and its population is shrinking. Huge public debt and ultra-low interest rates also leave it with few tools if global growth slows.
South Korea's challenge may be even bigger. While Korea boasts household-name corporate powers such as Samsung Electronics Co. and Hyundai Motor Co., it must work harder to thrive in increasingly competitive Asia.
Korea now has a chance to remind the world not to sell its economy short. And it can avoid repeating Japan's experience in the 1990s if the government takes advantage of the economic growth it now enjoys. The trouble is, that's a big ``if.''
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net .
Last Updated: November 13, 2006 14:01 EST