[Korea-Japan Competitiveness] Per Capita GDP Chasing Japan... Korea's Path at the Crossroads of Low Growth

Yen Value Drops Against Dollar, Narrowing the Gap Further

[Asia Economy reporters Seo So-jeong and Moon Je-won] "The gap in per capita Gross Domestic Product (GDP) between South Korea and Japan has narrowed to the smallest difference ever. Considering the past economic disparity with Japan, this is a remarkable growth."

Recently, an International Monetary Fund (IMF) official met in Washington DC, USA, during the G20 Finance Ministers meeting, and commented on South Korea's economic situation in this way. This remark implied that while the Japanese economy is struggling due to the yen's value falling to its lowest in 32 years amid the US's sharp interest rate hikes, the South Korean economy is holding up relatively well. In fact, inside and outside the IMF meeting room, where finance ministers and central bank governors from major countries gathered, there was a strong atmosphere of "not worrying much" about South Korea despite the global economic uncertainties. This aligns with the statements of IMF Managing Director Kristalina Georgieva, who met Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho in the US, and IMF Asia-Pacific Director Krishna Srinivasan, who recently visited South Korea, both of whom agreed that "there is no risk of crisis in South Korea."

Amid the global economic slowdown caused by the US's steep interest rate hikes and Russia's invasion of Ukraine, analyses suggest that the economic gap between South Korea and Japan is narrowing. This is because the yen's value has sharply dropped due to the dollar's strong performance this year, causing significant fluctuations in the Japanese economy. While Japan has experienced sluggish growth during its "lost 30 years," South Korea's per capita GDP has closely pursued Japan's, and wages and future growth rates in South Korea are also surpassing Japan's, showing a relatively positive outlook.

◆National Credit Ratings Two Levels Higher= A clear indicator of the economic reversal between South Korea and Japan is the national credit rating. In 1990, all three major international credit rating agencies (Moody's, S&P, Fitch) rated Japan's national credit rating higher than South Korea's, but this year, South Korea (Aa2·AA·AA-) has maintained last year's level and continues to surpass Japan (A1·A+·A). The three agencies commonly evaluate that South Korea has maintained solid growth while Japan's economy remains in long-term stagnation. The national debt, which contrasts with Japan's, also positively influenced the credit rating assessments.

The nominal per capita GDP reversal between South Korea and Japan is expected to be realized for the first time in history soon. According to the IMF, South Korea's projected per capita GDP for this year (in dollars) is $33,591, narrowing the gap with Japan ($34,357) to $766, the smallest level yet. If the yen's value against the dollar, currently approaching 150 yen per dollar, falls further, South Korea's per capita GDP is expected to catch up with Japan's soon. Last year, the Nihon Keizai Research Center, a Japanese private economic research institute, forecasted that Japan's nominal per capita GDP would be overtaken by South Korea by 2027.

The rapid narrowing of the economic gap between South Korea and Japan is attributed to the dollar's strong performance. Reflecting each country's economic fundamentals, the yen has depreciated 21.37% against the dollar this year, showing a larger decline than South Korea (-16.37%), Europe (-12.34%), the UK (-14.64%), and Australia (-11.29%). The Bank of Japan attempted to defend the exchange rate using substantial foreign exchange reserves but failed to hold the psychological resistance level of 150 yen per dollar. Nevertheless, due to national debt exceeding 1,000 trillion yen as of the end of last year, the Bank of Japan maintains an ultra-low interest rate monetary policy, whether voluntarily or involuntarily. In contrast, South Korea has responded to international economic fluctuations by raising its base interest rate faster than the US Federal Reserve since August last year. Although the won-dollar exchange rate exceeded 1,400 won for the first time since the financial crisis and the trade balance deficit continues, many in the international community, including the IMF, still evaluate that South Korea is "holding up relatively well" with an annual economic growth rate of about 2%, an annual current account surplus, and foreign exchange reserves of about $400 billion.

◆Premature to Celebrate Narrowing Gap= However, it is premature to celebrate the reversal of some macroeconomic indicators. While it is true that South Korea has held up relatively well amid the recent global "R (recession) fear," difficulties are increasing as the export growth engine, which supports the Korean economy, is fading, and external uncertainties are growing due to the Ukraine-Russia war and US-China conflicts. Above all, with China's rapid pursuit marking a turning point in the South Korea-Japan economic relationship, there is a pressing need for solutions to prevent South Korea from following Japan's footsteps at a crossroads of low growth.

Kim Gyu-pan, senior researcher at the Korea Institute for International Economic Policy, said, "It is true that South Korea's economic status has improved compared to the past, and it has closely pursued Japan, but it is not a time to be overly optimistic or pessimistic." He added, "The real shock to Japan occurred in 2010 when China's GDP surpassed Japan's for the first time in 42 years since 1968, causing Japan to lose its position as the world's second-largest economy after 42 years." Considering that China's per capita GDP was $12,500 last year, far below both Japan and South Korea, the absolute scale gap between South Korea and Japan remains.

In particular, low birth rates and aging populations are cited as the biggest risks threatening South Korea's economy in the future. Lee Jae-su, head of the Asia-Pacific Cooperation Team at the Federation of Korean Industries, expressed concern, saying, "Due to South Korea's severe low birth rate and aging population, the working-age population is at a disadvantage compared to Japan, and without countermeasures, South Korea could follow Japan's path." Researcher Kim also warned, "Japan, which experienced low birth rates and aging earlier than us, proactively prepared and implemented comprehensive social measures, which is a difference from us. Regardless of the effectiveness, compared to our passive response, our future could be bleaker." The Bank of Korea also analyzed in a report, "The Japanese government increased employment rates of women and the elderly by ensuring work-childcare compatibility and extending retirement age. Since South Korea, with a similar labor market structure and practices, has seen a decline in the working-age population since 2017, it may face the same problems as Japan, so it is necessary to proactively improve labor market structures."

Policies for a soft landing of the real estate market and structural reforms to maintain medium- to long-term growth potential are also needed. Jeong Dae-hee, head of the Global Economy Research Office at the Korea Development Institute (KDI), advised, "Policies that can enhance resource allocation efficiency, such as expanding labor market flexibility, restructuring insolvent companies, revitalizing startups, and easing entry barriers through regulatory reforms, should be boldly pursued."