Even After Japan's Bubble Burst, Construction-Centered Stimulus Policies Persisted
Rising Government and Household Debt Prolonged Economic Stagnation
Further Decline in South Korea's Construction Investment Ratio Possible
Excessive Reliance on Construction Investment for Economic Stimulus Should Be Avoided
An analysis has emerged warning against "construction investment for the purpose of economic stimulus" when an economy has reached a certain level of maturity and its potential growth rate has declined due to population aging. Based on the cases of Japan and China, the report points out that excessive reliance on construction investment for economic stimulus can lead to an accumulation of household or government debt, which undermines the economy's ability to recover and results in prolonged stagnation in construction investment.
The Bank of Korea made this announcement in a report published on the 26th, titled "Experiences and Implications of Prolonged Construction Investment Slumps in Japan and China" (by Kim Bohui, Deputy Head of the Asia-Pacific Economic Team, and Lee Junho, Head of the China Economic Team, among others).
Construction investment in South Korea is currently in a slump. It has posted negative growth for five consecutive quarters through the second quarter of this year, and on an annual basis, it has declined for four consecutive years since 2021. Given the unfavorable conditions in the construction sector, it is difficult to be optimistic about future construction investment.
The prolonged slump in construction investment is not unique to South Korea. Japan experienced a long period of stagnation in construction investment before South Korea, and China is also undergoing a prolonged downturn. In Japan, after the bubble burst in the early 1990s, the government tried to revive the construction sector by increasing public investment, but ultimately could not avoid a long-term recession. In China, continued excessive real estate investment following the global financial crisis has led to a severe construction sector downturn since 2021.
The report finds that in Japan, the economic recovery effect of construction investment-centered stimulus policies in the years immediately following the bubble burst was limited, and instead, these policies worsened fiscal conditions and had a negative impact on economic restructuring. Specifically, the report highlights issues such as inefficient allocation of public investment, deepening dependence of local economies on the construction industry, prolonged stagnation in household consumption due to rising household debt, and worsening fiscal conditions.
Kim Bohui, Deputy Head of the Asia-Pacific Economic Team at the Bank of Korea, diagnosed, "In Japan, the pursuit of construction-centered stimulus policies after the bubble burst led to an increase in both government and household debt, which became a factor in prolonging economic stagnation." The government’s fiscal capacity was limited due to increased public investment, while households, influenced by policies to revitalize the housing market, took out loans to purchase homes, resulting in restricted consumption during the subsequent deleveraging period.
Kim further noted, "The original role of public investment is to build and properly manage social infrastructure, but in Japan, its function as a means of boosting domestic demand or as an employment measure was excessively emphasized." He pointed out, "Because public investment was not carried out efficiently under a long-term plan, Japan is now struggling to maintain and manage the infrastructure built during that period, especially as the population declines."
In contrast, China is still in the process of deleveraging, and the construction investment slump continues. Kim commented, "The Chinese government appears to be trying to prevent a sharp real estate downturn but is not actively pursuing stimulus measures," adding, "This approach takes into account concerns about social conflict in China and also reflects lessons learned from Japan's past experience."
According to an analysis of the trends in the ratio of construction investment to gross domestic product (GDP) among major OECD countries, it takes an average of 27.2 years for the ratio to fall from its peak to its lowest point. Kim explained, "Countries with a higher construction investment ratio at the peak tend to have longer adjustment periods, and the decline during adjustment is steeper, resulting in a lower bottom." The average peak construction investment ratio among countries was 18.3%, with the average trough at 8.3% (a decline of 10.0 percentage points). In South Korea, the ratio peaked at 21.8% in 1991, fell to 13.9% in 2012, and then rebounded, meaning the adjustment period (21 years) was relatively short and the decline (7.9 percentage points) was also smaller compared to other countries.
In Japan, the construction investment ratio in 1980 was similar to South Korea's peak (22.1%), but after more than 30 years of adjustment, it reached its lowest point (10.2%) in 2010. Kim pointed out, "This suggests that South Korea's construction investment ratio could decline further in the future." Last year, South Korea's construction investment-to-GDP ratio was 13.9%, and with negative growth in construction investment projected for this year (?8.3%), the ratio is expected to fall even lower.
Kim concluded, "As seen in the cases of Japan and China, excessive reliance on construction investment for economic stimulus inevitably leads to a decline in the economy's recovery capability through the accumulation of household or government debt," adding, "Prolonged stagnation in construction investment will also be unavoidable."
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