Don’t fear Abenomics, Korea

Shinzo Abe has announced a major monetary expansion, or quantitative easing, that seeks to boost Japan’s inflation rate to 2 percent. This was met with considerable skepticism. Korea’s exporters worry that an inflationary, depreciating yen will reduce competitiveness. There is some truth to this. As the Bank of Japan prints more yen (inflation), the value of each yen in foreign currencies, including the won, should decline. This should help exports. Nevertheless, the effect is less than Korean exporters fear; the BOJ is explicitly avoiding the purchase of foreign assets to prevent dramatic depreciation. And the clear goal of Abenomics is not radical depreciation, but a re-ignition of Japan’s struggling economy after a quarter-century of stagnation. This is a goal Korea should support for five reasons:

First, Global Korea must be globally responsible. Korean elites regularly insist that Korea is a weighty player in the global economy. It is in the Group of 20; its GDP is in top 15. If Korea really wishes to be a central actor in global governance, it must act with larger interests in mind, not simply for short-term nationalist or chaebol goals. Japan is the world’s third-largest economy. Its success is of tremendous systemic importance. Much of the world’s financial press and institutions, including the IMF, support Abenomics, because they know how important it is for the global economy that Japan get back on track. Korea should not stand in the way to protect export sales; the issues are much greater than that. This is a test of Korea’s economic maturity.

Second, a growing Japan can be an export destination for Korea. Korea clearly takes some schadenfreude at Japan’s troubles. This is understandable given post-colonial resentments. But such short-term ideological satisfactions should not blind Korea to the obvious economic benefits of a healthy, functioning Japan right next door. Both Japan and Korea are trading economies. Both have an affinity for automobiles, electronics, pop music and so on that would make them an ideal free trade zone, much like Canadian-American economic integration. In the medium- and long-term, a growing Japan is good for Korea’s own growth.

Third, a stronger won is in fact in Korea’s interest. Too much of the Korean conversation assumes that what is good for Korean exporters is good for Korea. But this is not so. Samsung and LG are not Korea; they are just firms. While a cheap won does help their sales, there is a mathematically necessary flipside: imports in Korea are expensive, because the won is weak. This may suit the chaebol, but that is not in the interest of Korean consumers or small and medium enterprises who consume imports. The result of weak won purchasing power is far too many Koreans in deep personal debt to fund consumption. Korea’s problems with credit card debt, ‘rush-cash’ shops on TV, and the highest debt-to-income ratio in the OECD (155 percent) stem directly from the weak won. If Japanese products in Korea decline in price, that will help Korean consumers by offering cheaper alternatives, while simultaneously compelling Korean companies to lower prices and/or improve quality. This is a victory for the long-suffering Korean consumer.

Fourth, Japan is the lynchpin of the U.S. Asian security umbrella. Koreans dislike the notion that Japan is the primary U.S. ally in Asia, but this is so. Korea, Taiwan, Australia and others simply do not rival the centrality of Japan to the American position here. Should Japan continue its descent into stagnation, it would endanger the larger American ‘pivot’ to Asia. Unless Korea is prepared to pay substantially more for its own defense and stand increasingly alone against China and North Korea, Korea should support any effort to reflate Japan. But such a Japan is far more likely to succumb to Chinese dominance in Asia, drawing a separate peace with it and eventuating a U.S. withdrawal from Asia altogether. Only a normal, reasonably healthy Japanese economy can be a bulwark against Chinese primacy in Asia and an anchor for the U.S. Asian presence so critical for Korea’s own security.

Fifth, a normally growing Japan is far more likely to deal calmly with Korea on history and territory, and far more likely to contribute to post-unification reconstruction costs. Countries struck by crisis and fear empower extremists to promise radical answers to intractable problems. In Greece, the brutal euro-recession has brought neo-Nazis and communists into the parliament. It is in fact quite impressive that Japan has not drifted toward radicalism after so many years of confusion.

If Korea wishes Japan to come around on questions of history and territory, a calmer, healthier, more normalized Japan is a prerequisite for the domestic social liberalism necessary for concessions to Korea on these questions. Similarly, Japan islikelier to contribute to the huge costs of unification if it is growing normally and Korea is not perceived as an opponent who blocked Japan’s return to growth.

We realize this analysis maybe unwelcome in Korea, where the temptation to indulge ideological satisfaction over Japanese decline is strong, and where mega-exporters like Samsung have inordinate voice over exchange rate management.And we are not arguing for a return to Japanese super-growth of 40 years ago. Rather we believe Korea’s medium- and long-term interests are well-suited by a moderate, normalized, temperate Japan; that will not happen if Japan continues to stagnate.

*Kim So-yeon is a student at Pusan National University and a student delegate for Korea to the 2013 G-20 Youth Summit.

Robert E. Kelly is a professor at PNU; he will speak on Abenomics and Korea at the Economist annual conference on Korea’s economy this fall.

by Robert E. Kelly