[The Editors' Verdict] The Challenges of Economic Forecasting

The yen-dollar exchange rate moved between 145 and 150 yen from February to April this year, then surpassed the 155 yen level, and finally broke through the 160 yen level in early July. Feeling that the yen's weakness was excessive, we began preparing a special series in late June. From July 22 to 24, we published articles under the title [Super Yen Weakness].

[Super Yen Weakness]①Did international speculators join in... Structural background ②Rescuers during every Japanese economic crisis... History of yen weakness ③"If yen weakness continues, stagflation"... Warning of 'Japan's advanced country dropout,' Professor Noguchi ④BOJ's deepening dilemma... US-Japan interest rate gap and GDP shock ⑤"Forecast 143~159 yen in the second half"... US-Japan benchmark interest rates are key ⑥“Will exceed 165 yen within a year”… Warning from Japanese economists ⑦"Be cautious of export hits in automobile and steel sectors"... Continued departure of retail investors ⑧"If you are stuck with yen, wait one year... Long-term view needed for profit", among others.

Most domestic and international experts predicted that the 'Super Yen Weakness' phenomenon would be prolonged due to Japan's structural problems. As the titles suggest, the yen-dollar exchange rate was expected to remain high at 143~159 yen in the second half of the year and could exceed 165 yen next year. While the Bank of Japan (BOJ) could ease the yen weakness by raising the benchmark interest rate from zero interest rate (0~0.1%), there was also analysis that BOJ would find it difficult to raise rates soon because many small and medium-sized enterprises, intoxicated by zero rates, face a high risk of bankruptcy.

However, unexpectedly... when two heavyweight politicians in Japan criticized the excessive yen weakness, shaking the independence of the central bank, the BOJ surprised the market by raising the benchmark interest rate to 0.25% on July 31, contrary to expectations of a freeze. As a result, the rapid unwinding of yen carry trades contributed to the 'Black Monday' in global stock markets on August 5. In any case, the yen's value surged sharply, and in early August, the yen-dollar exchange rate was in the low 140 yen range, hitting the year's lowest point of 140.43 yen in early September, and the low 140 yen level was maintained until early October.

At that time, I thought the forecast was so wrong it was embarrassing, and I planned to write a reflective column at the end of the year about what was different from the forecast and why. If the yen-dollar exchange rate had not risen back to the 150 yen range (once reaching 155 yen), this column would have been a reflection.

The reason for this lengthy personal story is to say that economic forecasting is difficult for everyone. Although I listened to many experts at home and abroad, unexpected situations can occur anytime and anywhere.

The Bank of Korea has changed its economic forecasts from the previous 'first half this much, second half that much' to quarterly forecasts starting from the August forecast this year, such as 'how much in Q1, Q2, Q3, and Q4.' It immediately forecasted a 0.5% growth rate for Q3 compared to the previous quarter, but the actual figure was only 0.1%, drawing public criticism.

Quarterly forecasts are more difficult than semiannual forecasts and can have larger gaps between forecast and actual figures. Even before introducing quarterly forecasts, former Bank of Korea governors and Bank of Korea OBs reportedly opposed it, asking, "Why bother doing that?" However, advanced country central banks continue to make quarterly forecasts even if they are wrong. The Bank of Korea may also accumulate know-how and reduce errors by continuing quarterly forecasts.

The Bank of Korea's November growth forecast is 0.5% for Q4 this year, 0.5% for Q1 next year, 0.6% for Q2, and 0.5% for Q3. The consumer price forecast is 1.9% for Q4 this year, 1.9% for Q1 next year, 1.9% for Q2, and 2.0% for Q3.

Forecasting next year's economy is more difficult than ever. First, due to the unpredictable nature of Trump, the inauguration of the Trump 2nd term government itself is a huge uncertainty for our economy. Bank of Korea Governor Lee Chang-yong said at a briefing after the interest rate decision on the 28th, “Uncertainty will increase depending on what policies the new US government will implement and in what order,” adding, “There is a high possibility that the forecast will change in the February forecast next year.” The strength and specifics of the policies are also unknown.

Also, exports led our economic growth this year, with the semiconductor sector's improvement having the greatest impact, but uncertainty is increasing over how much China will further encroach on the global DRAM semiconductor market. Industry insiders expect that China's global DRAM production, which was zero (0%) just a few years ago, will exceed 10% for the first time this year. I also heard from an industry insider, “Our country exported a lot of semiconductors to China, but we expect Chinese semiconductor companies to completely dominate the Chinese DRAM market going forward.” How well Samsung Electronics can perform in the high-bandwidth memory (HBM) market is also crucial.

Regarding the Russia-Ukraine war, which greatly affected global prices, the Trump 2nd term government has already announced plans for a ceasefire before its inauguration. If the war ends, it will act as a downward factor for global prices, and if our country plays a certain role in Ukraine's reconstruction market, it is expected to be a positive factor for our economy. However, when and in what form it will end remains uncertain.

It seems there have never been so many uncertain variables when forecasting next year's economy. A senior Bank of Korea official said privately, “Depending on how various variables turn out, the growth rate could fluctuate between a minimum of 0.4 percentage points and a maximum of 1.5 percentage points.”

I hope economic forecasts are not harshly criticized when they are wrong. We also need to give more time and watch the quarterly forecasts carefully.