Agonizing path leads to a better future
Since the U.S. Federal Reserve’s implementation of quantitative easing (QE), $3.6 trillion has been injected into the U.S. economy. The Bank of Japan began QE in April 2013 and released 127 trillion yen ($1.05 trillion). But the results in the two countries are completely different.
The Fed announced it would start winding down its stimulus program as of the end of October. The U.S. economy grew by 4.6 percent in the second quarter and 3.9 percent in the third quarter. But two days after the Fed’s announcement, the Bank of Japan increased its QE to 80 trillion yen annually. Japan’s economy contracted 7.3 percent in the second quarter and 1.6 percent in the fourth.
There is a combination of reasons for the different outcomes. The drop in oil prices gave American households more money, and consumer spending makes up 70 percent of the U.S. economy. As people spend more, jobs are created and the economy is revitalized. While the analysis is logical, you may wonder why the equation applies only to America. Oil has gotten cheaper for Japan, too. However, personal spending has shrunk over the past two years. Consumer spending is 60 percent of the Japanese economy.
The core difference is whether or not a country has endured severe pain. After carrying out extensive restructuring and deregulation, the American economy is regenerating new flesh. After the global financial crisis in late 2008, the United States lost 8 million jobs in two years. More than 4 million houses went into foreclosure and were seized. Many of the businesses that were on the edge of failing had been weeded out. But that did not happen in Japan. There are so many “zombie companies” surviving on government subsidies. “The problem is that restructuring is not happening as banks continue to help insolvent companies,” said Yukiko Fukugawa, a professor at Waseda University. No matter how much money the Bank of Japan disburses, it flows into irrelevant places. No new flesh can be grown in such a structure.
Japan’s precedent is a cautionary tale for Korea. According to a Korea Development Institute analysis, more than 15 percent of Korean companies were “zombies” as of last year. They are mostly in the construction industry, where 41 percent are zombies, and transportation and shipbuilding industries, with 26 percent. As the final failure of these companies is delayed, investment and employment by healthy companies are hindered. It is a road to mutual destruction. Restructuring is painful, but we cannot avoid it. We must take the agonizing path for a better future.
The author is a business and industrial news editor for the JoongAng Sunday.
JoongAng Ilbo, Dec. 8, Page 30
by KIM JONG-YOON