[KR-JP Competitiveness] "Korea Risks Following Japan's Lost 30 Years... Must Establish New Export Strategy"

Severe Yen Depreciation Negatively Impacts Japanese Economy
Abenomics Failure Attributed to Inadequate Growth Strategy
South Korea Also Faces Productivity Decline Due to Low Birthrate and Aging
Need Export Strategy, Domestic Market Expansion, and Technological Innovation
Hanil Cooperation Can Create Synergy in Advanced Industries

Professor Lee Ji-pyeong, a special appointment professor at Hankuk University of Foreign Studies, is being interviewed by Asia Economy at a cafe in Dongjak-gu, Seoul on the 26th./Photo by Kim Hyun-min kimhyun81@

"The reason Abenomics failed is due to a lack of fundamental growth strategies. While the possibility of Korea experiencing a 'lost 30 years' like Japan is not high, the risk exists. To prevent this, Korea must establish a new export strategy, increase domestic investment by companies to boost productivity, and achieve technological innovation."

Lee Ji-pyeong, a distinguished professor at Hankuk University of Foreign Studies and a leading expert on Japan in Korea, gave this advice regarding the Korean economy struggling with high inflation, high interest rates, and high exchange rates in an interview with Asia Economy on the 26th. He emphasized that although Korea's asset market is stagnating due to successive base rate hikes, having witnessed Japan's bubble collapse in the 1990s up close, it is unlikely to be left to escalate into a financial system crisis, but countermeasures are necessary.

Professor Lee said, "Japan took money away from sound companies to support zombie companies, but to revitalize new industries or startups, it is necessary to properly restructure less competitive small and medium-sized enterprises. Korea should learn from Japan's bubble collapse experience." He added, "Korea has a higher export dependency compared to Japan, which is both a strength and a weakness," and explained that efforts should be made to enhance competitiveness in service and software exports and explore infrastructure package exports in the future.

Below is a Q&A with Professor Lee.

- The yen has fallen to its lowest level in 32 years. What is the impact of the severe yen depreciation on the Japanese economy?

▲ The impact of yen depreciation on the profitability of Japanese companies is generally negative. It may be somewhat positive for large export companies, but due to semiconductor shortages, increasing production is difficult, so the effect is limited. On the other hand, small and medium-sized enterprises, which account for over 90% of Japanese companies, face increased burdens due to higher import procurement costs. There is also research indicating that a 10% drop in the yen results in about a 900 billion yen negative effect on GDP.

- Nevertheless, the Bank of Japan (BOJ) is still maintaining an accommodative monetary policy. Why is that?

▲ It is the stubbornness of Haruhiko Kuroda, Governor of the Bank of Japan. Fundamentally, deflation is correct, but since prices are rising and the economy is in a recovery phase, negative interest rates or zero rates have significant side effects. Even among BOJ alumni (former executives), there are opinions that fine-tuning is necessary. It is expected that after Governor Kuroda retires in April next year, there will be rate hikes.

- According to a recent IMF announcement, the per capita GDP gap between Korea and Japan is expected to narrow to $770 this year. Is there a possibility of Korea overtaking Japan in the future?

▲ Korea's per capita GDP could surpass Japan's within a few years. However, the total GDP will only be about 66% of Japan's even in 2050. Since Korea's population is only about one-third of Japan's, productivity would need to be two to three times higher to surpass Japan, which is not easy. Korea is also facing severe low birth rates and aging, so if growth momentum is not maintained, it will be difficult to narrow the gap with Japan.

- What are the causes of productivity decline and low wage growth in Japanese companies?

▲ During the bubble collapse, severe restructuring lowered workers' morale and creativity, and investment in new businesses decreased. Also, when failing companies hurt banks, money was taken from sound small and medium-sized enterprises to support them. This increased zombie companies and led to a prolonged recession. Long-term deflation caused prolonged oversupply, and even among young people, a 'deflation mindset' developed.

- Why did Abenomics fail?

▲ It seemed effective for the first one to two years, but the last arrow of Abenomics?the growth strategy?was insufficient. Thanks to low interest rates, companies that should have failed continued to survive, lowering productivity. Due to low birth rates and aging, Japanese companies invested overseas instead of domestically, and corporate reserves did not translate into economic growth, creating a vicious cycle of declining productivity.

Professor Lee Ji-pyeong, a special appointment professor at Hankuk University of Foreign Studies, is being interviewed by Asia Economy at a cafe in Dongjak-gu, Seoul on the 26th./Photo by Kim Hyun-min kimhyun81@

- Korea's recent economic situation, including exports, is not good. What are the structural differences between the Korean and Japanese economies and their future prospects?

▲ Japan's current account balance is still in surplus, but there are concerns it may run a deficit this year. However, Japan has the world's largest overseas assets and has established a structure to live off income earned abroad. Of course, if the current account runs a deficit, overseas assets decrease, but even if there is a deficit this year, it is hard to say it is structural.

On the other hand, Korea is an immature creditor nation accumulating overseas assets. It is expanding assets based on current account and primary income surpluses. While preparing for low birth rates and aging, growth momentum must be maintained, but uncertainties exist due to US-China frictions and rising raw material prices.

- What strengths does the Korean economy have compared to Japan?

▲ Japan is strong in materials and parts, but Korea has the advantage of large-scale investment in advanced industries such as semiconductors and displays and globalization. Developing new industries requires many parts and technologies, where Korea has limitations. Japan has resources and invests heavily in R&D across all fields, so cooperating with Japan's materials and parts companies can create synergy in advanced industries like robotics and autonomous driving.

- Could Korea fall into a 'lost 30 years' like Japan?

▲ Japan's past real estate bubble was nationwide and large-scale, and the government deliberately neglected it. Korea also has bubbles in apartments in Seoul, and prices could fall 10-20% due to interest rate hikes. However, Korea has Japan's experience, and the bubble collapse is unlikely to lead to a financial market crisis. Still, risks exist. The biggest concern is productivity decline due to low birth rates and aging.

- What should Korea do to avoid a long-term economic slump?

▲ Maintaining export competitiveness is important. Korea needs a new export strategy to enhance weak service and software export competitiveness and expand infrastructure and package exports such as those by Korea Electric Power Corporation and Korea Water Resources Corporation. To respond to expanding protectionism, domestic demand must also be expanded by revitalizing local economies like Japan, increasing domestic travel demand, and nurturing local large companies. Innovation in manufacturing centered on the digital and green revolutions is also crucial.