[LINK] "Japan's Cautionary Tale for South Korea"

[rfmcdonald]

Bloomberg's William Pesek notes that, even though South Korea seems to be going from strength to strength, there are good reasons to fear it might enter into a period of relative stagnation like larger neighbour Japan.

South Korea still isn't taking Japan seriously enough. South Korea should be less concerned about its short-term export woes and more concerned about the prospect of mimicking Japan's lost economic decades since the 1990s. Unless policymakers act far more aggressively in the near future, they still risk a long term state of "Japanization," a semi-permanent deflationary funk that strangles living standards. Here are three ways Seoul can avoid that fate.

First, it should end its monetary stinginess. With inflation at the slowest pace since 1999 and exports down 3.4 percent last month, Lee should lower interest rates even further -- immediately. Considering monetary policy shifts can take six months to affect the real economy, South Korea can't afford to wait.

South Korea's high household debt levels -- currently at a record $962 billion, or 70 percent of gross domestic product -- are said to have dissuaded Lee from cutting rates sooner. And he's right not to take that problem lightly. But Seoul can offset the risk that lower rates will exacerbate household debt by introducing so-called macroprudential policies: tighter regulations on future loans; bans on risky, low down-payment mortgages; and even new taxes to deter households from becoming overly indebted in the first place.

Second, South Korea should prod companies to raise wages. Beginning this year, South Korea’s family-owned conglomerates, or chaebol, will be subject to a 10 percent tax on excessive hoarding of cash that could be better spent on wages or investments. But Korea also must address the breakdown of the labor market over the last 15 years. Today, about a third of the workforce is employed on temporary contracts that offer lower pay than full-time employees -- about 56 percent less, on average -- and limited benefits. The Japanese example underscores that this is a serious impediment to economic recovery: part of the reason that the combination of fiscal stimulus and monetary easing initiated by Japanese Prime Minister Shinzo Abe has failed to gain traction is that 38 percent of people in his country are working under similarly precarious conditions.

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Third, South Korea needs to stop obsessing over exchange rates. The country needs to become more competitive, but it would be a mistake to pursue that goal solely through depreciation. (Japan has discovered over the past two decades that depreciation can't counteract persistent deflation.) The South Korean government should instead be focusing on structural reforms that would give companies more incentive to innovate and raise productivity. (It could change the tax system, for example, to support new startups, rather than the chaebol who are privileged under current arrangements.) In that sense, South Korea should be modeling itself on Germany. As I've written before, German exporters don’t grumble about currency rates when times are tough; with encouragement from their government, they adjust and find new ways to maximize profits.