[The Trap of Statistics] ① Corporate Economy Pessimistic for 20 Years? ... It Seems So According to 'Han Eun BSI'

Despite Market Fluctuations, Has Not Exceeded the Standard Value for 20 Years

Kim Eun-su, a 27-year-old office worker, is contemplating investing in stocks as expectations for an easing of the economic downturn in the second half of this year grow. However, in the ongoing global economic slump, it was difficult for Kim to grasp the specific business conditions of companies, so he hurriedly began to sift through related statistics. While carefully examining the June Business Survey Index (BSI) released by the Bank of Korea on the 29th of last month, Kim soon found himself puzzled. The BSI for business conditions across all industries in June recorded 76, the same as the previous month, far below the baseline of 100. Looking at the long-term time series, this index has never exceeded the baseline of 100 since the monthly survey replaced the quarterly survey in January 2003, spanning 20 years up to last month. The highest ever recorded was 95 in May 2010.

According to the June Business Survey Index (BSI) results released by the Bank of Korea, the BSI for business conditions across all industries in June remained at 76, unchanged from the previous month. This index reflects entrepreneurs' judgments and outlooks on current business conditions, where a value above 100 indicates positive business conditions, and below 100 indicates negative conditions. However, for over 20 years, the Bank of Korea's BSI has never surpassed the baseline of 100, and even the highest historical value falls well below this threshold, leading to ongoing criticism that the general public finds it difficult to intuitively assess corporate business conditions.

Bank of Korea Considered Standardization in May Last Year but Dropped It

In particular, it has recently come to light that despite ongoing internal debates at the Bank of Korea about the need to revamp the BSI, the Bank ultimately decided last year, after final review and discussion of the BSI standardization work, to maintain the existing method. This year marks the full implementation of the triennial sample revision process, so if the BSI standardization had been decided last year, the new sample work this year could have incorporated the standardized improvements, potentially allowing the updated index to be applied as early as September. The delay in this standardization work has even been attributed to the Bank of Korea's characteristic organizational culture, which is reluctant to embrace changes to long-standing practices.

A Bank of Korea official explained, "When the need to revamp the BSI was raised last year, we conducted a thorough internal review. However, since respondents' tendencies differed between manufacturing and non-manufacturing sectors, the movements varied, raising concerns about comparability with previous data during standardization. It was difficult to achieve a one-to-one absolute level matching across industries, leading us to conclude that the benefits of standardization did not outweigh maintaining the existing statistical method."

The BSI quantifies the business sentiment felt by companies and is significant as a leading economic indicator. Unlike other economic indicators, it can capture subjective and psychological elements of entrepreneurs and quickly gauge companies' perceived economic conditions. Especially in a year like this, when different stakeholders have varying sentiments about the timing of an economic rebound and the situation changes rapidly, the need for a timely indicator that swiftly reflects corporate sentiment is even greater.

Given these circumstances, there is criticism that the Bank of Korea's BSI is somewhat sidelined as other institutions' similar indicators frequently appear in the media. Notably, the Federation of Korean Industries (FKI) releases its Business Survey one day before the Bank of Korea's BSI announcement each month, and the market tends to pay more attention to the FKI's release, leading to a rivalry between the Bank of Korea and the FKI.

The FKI surveys the top 600 companies by sales, focusing on large corporations, and unlike the Bank of Korea's BSI, its index fluctuates above and below the baseline of 100 depending on the economic situation, allowing the general public to intuitively grasp corporate sentiment. However, this approach also faces criticism. A Bank of Korea official stated, "For statistical consistency, it is important to extract probability samples, and selecting samples mainly from large companies with high sales is not ideal from a statistical rigor perspective. The BSI focused on large companies inevitably carries bias."

In the June BSI survey, the Bank of Korea surveyed 3,255 corporate entities nationwide, with 2,791 companies responding, including 1,659 in manufacturing and 1,132 in non-manufacturing, resulting in an 85.7% response rate. Despite the significant effort in terms of the number of surveyed entities compared to the FKI, there are criticisms that the utilization of this data in financial markets is low relative to the effort.

Need to Develop Composite Index Like US PMI... Must Enhance Reliability

Experts advise that the Bank of Korea should take this opportunity to consider and implement improvements to the BSI overall. The Bank of Korea's BSI was developed based on Japan's corporate sentiment index, the 'Tankan' index, but since it focuses mainly on business conditions, it has limitations. Therefore, it is suggested to develop a new index similar to the Purchasing Managers' Index (PMI) published by the US Institute for Supply Management (ISM), which applies weights to multiple item results to restore reliability.

Professor Lee Geung-hee of the Department of Statistics at Korea National Open University emphasized, "The BSI has broad utility as it quantifies the business sentiment of frontline companies, enabling economic forecasting. However, Korea has a strong trauma regarding statistical changes due to concerns about political use of statistics. It is necessary to actively carry out statistical adjustments reflecting changing times and refer to advanced countries that incorporate these into their indicators, thereby realistically revamping the BSI."

In response, a Bank of Korea official said, "The sample revision plan was announced in January this year, and pilot surveys are already underway, so it is difficult to make improvements now. There are issues with extending the time series if we improve the current indicator. We are considering developing a composite index like the US and China PMIs or creating a standardized index to use as a supplementary indicator in the future."