New economics to stop deflation

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New economics to stop deflation

“Prices from 20 Years Ago!” Supermarket chains often have promotions that appeal to nostalgia. One lunch shop has been packed with a menu featuring prices from two decades ago: “Bean sprout soup: 970 won [$0.90], Fish plate: 1,500 won.”

However, “back in time” marketing does not work in Japan, where prices have hardly changed for 20 years. Yakult, a popular fermented milk drink, announced a price increase starting in November, and it was covered like it was a news story. It took 22 years to raise the price of a small bottle of Yakult from 35 yen ($0.35) to 40 yen.

While Japan’s long run of deflation used to be considered a bizarre and unique problem, it has recently been showing signs of becoming a reality in Korea, too. The rate of increase for consumer prices has remained at 1 percent annually for 10 months now, and there’s no sign of recovery in the real estate market. Some observers have rashly compared these signs to the early stage of Japan’s prolonged economic slump.

Average citizens do not welcome the price of a bowl of bean sprout soup going up three-fold. But it is an outcome of economic growth. Over the last 20 years, Koreans’ incomes went up, as did the price of apartments. Still, it is worrisome that this unprecedented price stability has been accompanied by decreased demand, consumption and investment.

Deflation proved its destructive power in the “lost two decades” of Japan. When prices fall, the value of money goes up. This causes people to delay their spending and horde their cash. As people sell off properties and assets, prices fall further, causing a vicious cycle.

Japan’s deflation is still far from Korea’s reality, but Korea is certainly following in their footsteps.

The Korean economy’s appearance has improved greatly. Korea is already considered a developed country in international financial markets, and the interest by international investors to buy into the Korean market is the strongest in three years. But do we feel those changes within Korea? Foreign currency reserves are growing and the trade balance is in the black, but household debt is growing faster than ever before. Samsung Electronics enjoys higher profits every year, but unemployment is on the rise and structurally sluggish domestic consumption puts small business owners in jeopardy. The sovereign credit rating is going up while individual credit is getting worse.

What’s going on here? As emerging markets have suddenly lost their flavor for international investors, the Financial Times reported that “Korexico” - meaning Korea and Mexico - has become an attractive alternative. However, Korexico is just a temporary hideout, not a final destination, because of the economic structure of both countries is heavily dependent on trade, suffers from low growth and has high inequality.

The causes and solutions are clear. We cannot continue to rely on the growth engines of export and manufacturing. We need a paradigm shift to stop the accelerating aging of our population, as well as low-growth and polarization.

*The author is a business reporter of the JoongAng Ilbo.


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