[VIEWPOINT]Korea can learn from Japan’s recoveryJapan is going to raise interest rates soon. After five and a half years, it seems that the age of zero interest rates is finally coming to an end. A small interest rate hike may not have a big effect on the Japanese economy, but the meaning it symbolizes is big.
It would be Japan’s public proclamation that eight years of deflation, the longest since the great economic depression of the 1930s, has come to an end. It would also mean that Japan is totally free from the longterm economic depression that occurred when its economic bubble burst.
Unlike short-lived economic revivals, the Japanese economy now appears to have almost no possibility of a sudden fall. And if the economic expansion continues through the end of the year, Japan will set the record for its longest period of economic prosperity since the end of World War II.
The most serious structural problems, the so-called three excesses ― in employment, in insolvent credit and investment in facilities ― have already disappeared, and the problems left for Japan are just an aging society and the national debt. The Japanese economy that once suffered from the disgrace of its “lost 10 years” is ready to surprise the world again. Will there be 10 golden years for Japan?
Japan’s move to raise interest rates reminds us that “Opportunities come only for those who have prepared for them.”
The faces of Japanese officials I met in Japan last April were filled with confidence. They said in unison that the driving force of economic recovery was the “Koizumi reform.” However, the Koizumi reform was not drastic, like the “cutting the Gordian knot” reform that South Korea carried out during the foreign exchange crisis in 1997-1998.
Just three years ago, the Japanese government bought stocks of the bankrupt Resona Bank at a high price, causing the strange phenomenon of a soaring stock price for an insolvent bank. Still, the Japanese government must be given credit for its steady and continuous efforts in achieving the gradual improvement of the system.
The most important thing of all is, however, the private businesses’ recovery of confidence.
Japanese companies have consolidated international competitiveness through restructuring, which they have pursued for survival for a long time. And it is important that the bubble burst and the deflation, which happened over a long period of time, solved the problem of high cost structures.
The indices of real estate in six major cities this year, including Tokyo, fell to the level of the late 1970s and general commodities prices also dropped to 1987 levels. Factories that moved overseas have started to come back to Japan. Outsourcing has changed to insourcing. In addition, with the increase in the number of temporary jobs, businesses are making more money because they can pay less.
The economic boom originating from China’s surging demands between 2002 and 2004 is in the background of Japan’s rapid recovery. Japan firmly took hold of the chance and used it to revive its economy. And now, the Japanese economy has recovered enough to raise interest rates. The chances of an economic boom originating in China have also come to Korea. And Korea has more temporary jobs than Japan.
Nevertheless, far from solving the high cost structure of the Korean economy, Seoul has become the second-most expensive city to live in the world. Korea has failed to use the chance offered by China because our businesses have expanded outsourcing instead of insourcing.
If Japan raises its interest rates, Korea will have a new opportunity. With a decrease in the gap between the interest rates of Japan and the United States, the so-called “yen-carry trade” of buying a U.S. Treasury bond with Japanese yen borrowed from Japanese banks will slow down.
Therefore, there is a good chance the exchange rate for Japanese yen will go down. If this happens, the exchange rates of other Asian currencies, including the Chinese yuan, will be under pressure to drop, too.
According to the U.S. National Bureau of Economic Research, the yen has to drop as much as 60 percent from its rate at the end of last year, and the rates of other Southeast Asian countries’ currencies, including the Chinese yuan, would fall drastically, too.
Such a situation may provide relief to Korean export companies that are having a hard time due to the strong Korean won right now.
However, what we have to pay attention to more than anything else is the way Japan solved the high cost structure.
If we fail to get rid of the high cost structures, the Korean economy will never be able to regain its competitiveness and will end up exhausting all of its strength.
It is time for us to put our heads together and work out a plan with which we can fix the chronic high cost structures of our economy, while avoiding going through 10 years of depression.
* The writer is a senior research fellow at the Korea Institute of Finance. Translation by the JoongAng Daily staff.
by Park Jong-kyu