Slow-burning danger ahead
The time has come for Korea to take up an aggressive campaign to stimulate inflation. This was a headline for the JoongAng Ilbo on Nov. 19 last year. The article was to warn that Korea was heading in the same path as Japan when it entered a deflationary tunnel that lasted for 20 years.
Consumer prices had been moving at the 1 percent range for 24 months in a row. I also warned against falling into the sweet temptation of low consumer prices as the Japanese had done in early 1990s. The Bank of Korea shrugged off concerns saying deflation was not a worry for the nation. The consumer price index has been hovering at zero percent range since December. If the government had not raised the tobacco price on Jan. 1, we would have seen a minus growth in inflation for the first time ever.
The government and the Bank of Korea last week declared a war against deflationary pressure in their coordinated economic policy outline for next year. The central bank would direct monetary policy to stimulate consumer prices instead of depressing them for the first time since its establishment in 1950. The following day, the U.S. Federal Reserve in a monetary policy meeting, officially lifted its base rate, which had been at near zero percent since 2008. Korean authorities lost their ammunition before they began their battle with deflationary risks. Korea had suffered from a major capital flight at every decisive turn in global financial trends. It would be inviting deflation if it blindly follows the United States and raises the key interest rate, but also could risk another capital exodus if it stays put.
Of course, Korea is not in the same danger as it had been during the Asian currency crisis in 1997. The country last month incurred its largest-ever trade surplus of $10.4 billion. The current surplus as of October this year reached $87.9 billion. Foreign-exchange hoard has stocked up $368.5 billion. No country in history has gone bankrupt with more than $100 billion in its coffers. Moody’s Investors Service upgraded Korea’s sovereign debt rating by one notch to an all-time high of Aa2, the rating agency’s third-highest ranking which places the country a step above China and two above Japan. But we cannot gloat over the record-large trade surplus. The surplus is not due to exports, but shrinking imports. Korea is an exporter which assembles goods based on raw-material imports, and sinking imports translate into depressed industrial activity and exports - an irony of trade surplus.
If the external front cannot provide hope, we must turn to domestic demand to drive the economy. Even with consumer prices at an all-time low, the working population cannot afford to increase spending. The hike in tobacco prices has only made a toll on pocket money. There is little sign of skyrocketing rent prices easing. Although international oil prices are at record lows, public transportation fares have all risen. Prices of popular liquor soju and expressway toll fees will also go up next year. Life has become more difficult. As people refrain from spending, prices slip further - another irony of low prices.
Japan has finally shaken out of a long deflationary cycle thanks to Prime Minister Shinzo Abe’s all-out stimulus campaign. Korean President Park Geun-hye had been equally eager. She was elected in 2012 with 51.6 percent of the vote, the first time a president won a majority vote since direct presidential election was institutionalized in 1987. She has an unwavering support base. Moreover, the only main opposition party is the weakest, teetering on the brink of a breakup due to an internal power struggle. Still, the 19th National Assembly with a majority ruling party was one of the worst performing legislatures - the last irony of strong leadership.
A frog in boiling water desperately tries to get out. It would do whatever it takes at a life-and-death moment. Koreans were like that when they faced the currency crisis in 1997 and global financial crisis in 2008. But a frog in slowly boiling water does not feel the danger. Korea is enveloped in multiple illusions. We may not be fully aware of the looming danger. When we finally realize, it could be too late.
JoongAng Ilbo, Dec. 21, Page 34
*The author is the business news editor of the JoongAng Ilbo.
by Jung Kyung-min