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Korea follows the path of ‘Japan’s Lost 20 Years’ but has time to change2015 economic forecast of Korea by Nomura Research Institute Seoul

Korean and Japanese economic experts at the Nomura Research Institute of Japan in Seoul have published a large-scale forecast of the Korean economy for 2015 taking into account the economic situations of the United States, Japan, China, Europe and other countries that could exert influence on the Korean economy.
It shows a series of problems the Korean economy faces and tries to point out solutions to the problems that Korea might face in 2015, and advises that Korea is passing a point of great economic transition. It also offers suggestions as to what Korea should do to successfully wade through a period of low growth and prepare for a big jump to the group of advanced countries of the world.

In making the forecast, the Korean and Japanese researchers made repeated revisions on three different occasions until early November last year to make the necessary alterations due to the fast-changing economic situations in Korea and in the countries surrounding Korea. Here are some important points of the economic forecast of Korea for 2015, which have been presented by economic experts in Korea published by various media, including ChosunIlbo and Book Review:

It looks like the South Korean economy is in a somewhat critical situation. Korea is inundated with pessimistic views on the outlook of its economy. Standing out from them is the concern that Korean may be following the sad past of the Japanese economy. The pessimists think that the Korean economy is following a path that is very much like that of the “Lost 20 Years of Japan.”

Japan had been doing very well. However, beginning in the mid-80s, she entered a period of stagnation because of the high Yen followed by its gradual loss of international competitiveness in the export industry.
In order to cope with this situation, Japan used a low bank interest rate policy. But this gave birth to a bubble phenomenon in the real estate market and the busting bubbles brought about deflation bringing the level of economic growth nearly to zero and then a long period of stagnation. After 10 and 20 years of such a situation, Prime Minister Shinzo Abe of Japan used a policy of low Yen. However, economic experts in the countries around Japan predict that the “20 Lost Years” could continue into “Lost 30 Years.”

An overwhelming number of people in Korea are worried that Korea might have started treading the same path. They say that economic environment surrounding Korea is not very promising. In the past, strong economy of the United States had a favorable impact on the Korean economy. However, the good economy of the US nowadays is a little different from how it was in the past. The Federal Reserve Bank (FRB) is trying to normalize the US economy through ‘tapering’ on the ground that the US economy will improve, which is expected to entail increases in bank interest rates.

According to the ‘Economic Outlook of Asia and Pacific Region for 2015’ published by IMF (International Monetary Fund) last year, South Korea will be most seriously hit among the Asian countries and that the GDP growth of Korea will be between 3% and 3.5%.

▲A Korean automobile plant assembly line. Automobile industry is one of the most important export industries of Korea.

Japan is trying to increase the competitiveness of its export industry through Abenomics that is predicated on the low Yen, which drives the Korean export industry to bay. Korea has been banking on its export market in China. However, China, too, is facing a drop in its economic growth rate, which makes it that much difficult for Korea.
However, some experts suggest that Korea could make the crisis an opportunity. And the economic policy makers of the Korean government are expected to make the most of such a possibility.
However, the so-called ‘Choinomics’ of Deputy Prime Minister/Strategy & Finance Minister Choi Kyung-hwan, which seeks to improve the economy through reduction of restrictions on the financial organizations and on the loan-to-value (LTV) and debt-to-income (DTI) which is related with the real estate policies, are expected to bring more ill side effects than any benefit. Of course, there are experts who say that it is too early to pass any judgment on the outcome of the ‘Choinomics.’
NRI’s book, “An Overall Forecast of the Korean Economy 2015,” contains some acceptable details.

When Korea had a bright economy and when sometimes there were some incorrect economic forecasts by some Korean economic research institutes, the NRI kindly corrected the mistaken views.
The NRI has published its ‘Grand Forecast of the Korean Economy’ this year. It is the third time such a book has been published--after the first one in 2013 and the second one last year. It forecasts the overall economic picture of Korea and then an analysis of the Korean industries.
The NRI report deals with the world economic trends in Part I and the need for structural reforms of the major industries of Korea in Part II.
Nowadays, Korea, too, has excellent economic research institutes such as Samsung Economic Research Institute and the Hyundai Research Institute, who offer economic analyses that compare favorably to a measure with those of the NRI.
However, NRI has been conducting an objective review of the Korean economy, which merits our attention.
The NRI report reveals that Korea has entered a period of low growth. However, it points out that Korea has now entered a very important period of time when it should try to upgrade the quality of its economy and improve the level of its industrial structure. It warns Korea not to tread the same path of Japan.

Korea put stronger emphasis on the economic growth and used a business-friendly policy rather than on social welfare so that the good effects of the policy will trickle down favorably to the other segments of the society. Such a policy, however, did not produce its desired effects and the outcome is a situation which one finds difficult to judge as ‘normal’ or ‘abnormal.’
In Part I (the world economic trends), the US is making a stable growth and Europe continues to have a hard time. Japan seems to be enjoying a quick improvement thanks to the Abenomics but the growth is not very high since the serious earthquake in Eastern Japan. China has entered the state of a semi-developed country and is fighting a hard battle to extricate itself from the rut of that state.

Other Asian countries, such as the newly developing ones, are expected to continue enjoying a period of a relatively stable economy but, all the same, they are worried about the possible ill impact on their financial market from the ‘tapering’ policy of the US.
In the case of Korea, the NRI report puts an underscore below the ‘crisis of the manufacturing industries’ and examines the possibilities of success of the market policies of the Choinomics that confront the market and the possibilities of Korea’s treading the path of “The Lost 20 Years” already trodden by Japan.

In conclusion, NRI obviously feels that Korea is treading a similar path to Japan but is in a more or less better situation than Japan.
What should Korea do?
Korea should try to reduce the household debts, stabilize the real estate market, and stimulate the domestic consumer market.
The sustained increases in the household debts must have come from purchasing houses. The recent drop of the real estate prices casts a truly gloomy sign on the outlook of the Korean economy. This is a tangible sign. The dropping prices of the real estate will give birth to many ‘house-poors’ and this will decrease the value of the collateral and security that the banks have from the debtors?eventually bringing the collapse of the middle class.
This kind of situation, in turn, will cause reduction of consumption and gradual decrease of demand for housing?a vicious cycle. The expression, “Age of Monthly Rent’ (vis-?-vis ‘Age of Deposit’ in lieu of monthly rent), eloquently bespeaks the situation.
Korea, China and Japan all have a cause for an economic crisis and a close look into the situation shows that they all have one thing in common. The problem they have is the real estate.
Perhaps this is why the Choinomics has a strategem to deal with the real estate problem. However, one warns that the Choinomists must be careful with their way of dealing with the real estate problem. The US has increased the bank interest rates but Korea either froze or lowered the interest rates to maintain the use of Choinmics. In this situation, there are possibilities of Korean capital seeking its way out of Korea and into the US financial. Korea might have to face another ‘foreign exchange crisis’ that it underwent in 1997.

Due to the low Japanese Yen and the slow economy in China, Korean export industries are expected to have a tough time. The only solution in this situation is to stimulate the domestic consumption.
One of the solutions is to increase wages and dividends of the shareholders. The preceding government (of President Lee Myung-bak) gave the Korean businesses much benefits by reducing their corporate tax from 25% to 22%. Now the businesses should increase the wages of their employees and the dividends of their shareholders to improve the domestic market conditions. This could also contribute to increasing employment.
In Part II, the NRI report deals with the five major industries of Korea that support the Korean economy, namely automobiles, electronics, electrics, real estate and real estate plus the distribution industry and health care industry. The NRI makes some good suggestions.
For the automobile industry, 2015 must be a year for readjustment for the leading automakers in Korea and the electronics-electrics industry should try to check and examine itself as to what it should do to survive a period of turning point where the makers of such products as 3D printers should change their paradigm of operation and management.
Recovery of the real estate market will not be easy and the related policies of the government should be implemented closely following the changes in the consumption trends of the housing market. In this situation, ‘recycling of cities’ appears interesting.
In the case of the distribution industry (including stores), only the companies who satisfy the needs of the consumers will survive the difficult time. As for the health care industry, one has to wait and see if a ‘big bang’ will really come.

As the NRI report stated in its preface, it is true that all the conditions and environment surrounding the Korean economy this year are not so bright but unstable and somewhat gloomy. However, it pointed out that if the structural problems are solved and improved and new growth engines are explored and developed, it is a situation where there are possibilities of outliving the economic difficulties.
The Korean people have had difficult times in their past history, but each time they successfully waded through them with unity.
However, the same Korean people do not seem to see the signs of a crisis. There are the sad reports. We hear the sad name of ‘Three Po Generation,’ nay, even ‘Five Po Generation.’ ‘Po’ means ‘To give up’ and ‘Three Po’ means ‘To give up three things,’ namely loving, marrying and having a child or children. ‘Five Po’ means go give up the three things mentioned and additionally ‘getting a job’ and ‘buying a house.’ There also is an expression, ‘Seven Po Generation,’ which is to additionally give up ‘human relationship’ and ‘hope.’

The arrogance and ‘law-bending’ (instead of outright ‘law-breaking’) perpetrated by the haves against the havenots and the value of the real estates precariously maintained by government measures are among the things that need proper attention.
Will the Korean people successfully wade through the much talked-about ‘Crisis of 2015’? Or will they fall in the same quagmire that Japan experienced bitterly?
It is clear that it is time for the Korean people to change their attitude and join hands with one another to tide over the anticipated crisis.
The political parties should do away with their needless fighting and the government policies must be formulated with insight to lead the people in overcoming the difficulties.

이경식 기자  edt@koreapost.com

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