[OUTLOOK]Tiny bubbles soon sour the wineFrom what I learned about Japan as a correspondent in Tokyo 11 years ago, I judged that equity bubbles in Korea and those of Japan were different. Back then, it was hard to find traces of burst bubbles on the surface in Tokyo. I could spot some run-down houses on prime land in Tokyo. As bubbles burst, people who could not pay inheritance taxes made the tax payments with their luxury homes. The suicide rate surged and people lamented during their drinking sprees. Japan lost confidence and started to look at Spain as a model instead of the United States.
Experts find three characteristics in the bursting of Japan’s bubbles. First, the characteristics of the bubble economy were very aggressive. For instance, banks lent up to 120 percent of the price of a house. Second, interest rates were raised drastically. Third, corporations were major culprits in speculation, unlike Korea where individual purchases of apartment units are a serious problem.
This analysis focuses on the sizes of bubbles of the two countries and the different culprits. It admits that both economies have bubbles. There is a range of bubbles, from large ones as in Japan to mini-bubbles. It is foolish to emphasize differences in the two countries and to claim that Korea does not have bubbles in its economy.
In fact, Korea’s economy has traits similar to those of Japan’s bubble economy. The process of the formation of bubbles is the same; to boost the economy, you see low interest rates, surplus liquidity and increased loans for real estate. The government implemented measures such as regulating permits for land purchases or sales and imposing heavy holding tax transfer taxes. Those are exactly the same things Japan did. The government is hesitating over implementing monetary measures, like Japan does. Japan hesitates to raise interest rates to keep its exporters competitive because they are losing their competitiveness with the strong yen. Korea also wants to keep interest rates low, saying that will help revive the economy.
The two countries also have an absence of national leadership in common. In the late 1980s in Japan, the approval ratings for the Liberal Democratic Party plummeted and party members fought ferociously over power. In Korea, the president says he does not want to become the first president not to serve a full term. The Grand National Party does not present alternative measures. It is somewhat fortunate that Korea has a presidential election next year, so it has a chance to have new leadership soon.
Both countries also have a low birth rate and aging populations. In Japan, during the nearly 10 years since the bubbles burst, prices for properties have gone down 1 to 3 percent each year. Many experts say changes in the structure of the populace are the main cause for that trend. As most of the young generation were only children, they did not want to buy houses even after they got married. A married couple knows that they will get two houses after the parents of the two have passed away because there are no siblings to remember in parents’ wills. Demand for houses has dropped significantly. In Korea, an increasing number of young people have given up trying to buy houses because prices are surging. Some try to have improve their relations with their parents to get houses later.
There is no guarantee that we will not take the same path as Japan. When the national leadership has disappeared, there is no other way but to keep going until it ends either well or badly. We can only hope that no bubbles pop.
But some analysts say 30 percent of the prices for apartments are froth. The Korean national tax agency warns that prices of luxury apartment units in affluent southern Seoul are double the prices of similar units in Tokyo. If land prices drop 20 percent and prices of apartments fall 30 percent, 800 trillion won, or $860 billion, will evaporate. That will be double or triple the shock of the financial crisis of 1997-98.
I believe that there is something wrong with current prices of apartments in Korea. I believe that the supply of apartments should be increased, interest rates should be raised gradually and surplus liquidity should be controlled. We should learn a lesson from Japan’s failure; if there are bubbles, we should burst them step by step. There are tons of books and reports on Japan’s bubble economy. A book published by the Japanese government in 1993 begins by saying that once bubbles are created, they distort the way resources are distributed, and the economy has to pay a high price. There are no bubbles that have economic advantages, and all bubbles have only problems, the book continues.
It will be very painful and stupid if we make the same mistake, with Japan right next to us.
*The writer is an editorial writer of the JoongAng Ilbo.
by Lee Chul-ho