Korea’s stimulus looks like Abe’s

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Korea’s stimulus looks like Abe’s

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On top of the government’s property market normalization plan, a tax plan announced by the Finance Ministry last week is raising hopes that the Korean economy might pull itself out of the doldrums it has sunk into. particularly since the tragic Sewol accident in mid-April, which depressed consumer spending.

Market analysts note that Finance Minister Choi Kyung-hwan’s aggressive approach to economic stimulus might even produce the kind of pizzazz seen in the Japanese economy since last year.

Economists say there are several similarities between Korea’s economic stimulus plans and Japan’s so-called Abenomics.

Prime Minister Shinzo Abe championed the idea of thrusting Japan out of a two-decade recession through aggressive fiscal and monetary policies, along with economic structural reform down the road. Japan’s recent recovery could set an example for the Korean economy, which exhibits signs similar to those in Japan 20 years ago when the country’s asset bubble burst, leading to contraction of the domestic market.

In a report released yesterday, Daishin Securities analyst Kim Seung-hyun noted similarities between Abenomics and the policies presented by Choi in that both countries vowed to employ strong macroeconomic policies until their economies showed solid evidence of recovery. The stimulus plans consist of revitalizing the domestic market by improving the household spending environment.

“Since the Japanese central bank last year announced a quantitative easing that is targeted at achieving 2 percent consumer price growth within two years, there are signs of revitalization in the Japanese economy mainly centered on consumer spending,” wrote Kim. “The Japanese economic recovery is not only the result of the government’s stimulus programs. [Abenomics] isn’t the first stimulus policy the Japanese government has released in the past 20 years. The difference is that until now the policy drive had been weak and there was a lack of faith that the policies would continue.

“Compared to the past, the private sector’s and, particularly, households’ faith in Abenomics has become stronger.”

The Daishin analyst said such trust in Abenomics is seen in improving consumer spending. He said Japanese consumers, who have been cutting back on spending and busy deleveraging due to uncertainty about the future, reported the highest spending tendency last year since 2000. Even though the Japanese government raised its consumption tax in the second quarter, it failed to dampen consumer spending. Although household disposal income in June fell 8 percent compared to the previous year, consumer spending fell only 4.5 percent.

Based on the changes in Japan “the Korean economy, too, could improve its household spending tendency, which could speed up the [economic] growth rate when faith in the economy recovers,” Kim wrote.

Although some of market experts have raised concerns that the Korean government’s all-out stimulus could backfire, they agree that faith is crucial in turning the tide.

“The Korean economy isn’t in a critical situation where it is falling back into recession,” said a financial industry official who requested anonymity. “If you look at the [Bank of Korea’s] revised outlook, the growth projection only fell from 4 percent to 3.8 percent, which is still the strongest in the last three years. The problem lies on the psychological effects as a dampened mood could decelerate the economy to a standstill. That is why Minister Choi is pushing strongly for a stimulus program including businesses to increase dividend payments and raise wages.

“The only problem is if such an aggressive drive by the government works, the market’s faith in the government to push the economy up with be restored. But if it fails to turn the situation around as much as is hoped for, the government will have no more ammunitions to resort to and that would only makes the situation worse.”

Kim of Daishin group said the situation faced by the Korean government is better than the Japanese government’s mainly because it doesn’t have negative factors like having to raise the consumption tax. And Choi’s policies are more clear and detailed, which gives stronger credibility.

“There have been several changes in Japan such as a cutback on its growth strategies that were announced last year for political reasons,” Kim said.

BY lee ho-jeong [ojlee82@joongang.co.kr]









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