Learn lessons from Japan

The Bank of Japan took another drastic move to jump-start its stubbornly moribund economy by pushing the interest rate into negative territory. It would set the rate on excess reserves at banks at minus 0.1 percent, meaning that lenders will have to pay the central bank for parking any reserves that go beyond the cap. The rate on most existing reserves would stay at the same 0.1 percent, kept since October 2010.

The unprecedented negative-rate action underscores that Tokyo is running out of ammunition in both the fiscal and monetary front despite its ultra-loose policy and big fiscal spending. The ambitious policy mix dubbed Abenomics has failed to push the economy out of a deflationary cycle especially at home with domestic spending falling 4.4 percent in December. The extreme move is intended to encourage consumers and companies to take out their bank savings to spend or invest elsewhere.

Negative interest rates have already been tested by a number of European central banks - the European Union, Switzerland, and Sweden - as a last resort after their zero deposit rate and quantitative easing programs failed to inflate their economies. The world’s third largest economy has been showing worrying signs with the inflation at 0.5 percent, far below the targeted 2 percent rate, the yen turning upward, and the economy moving at a snail’s pace, threatening the reform agenda.

The struggling Japanese economy suggests the difficult challenges facing the global economy, dealing more bad news for the Korean economy which is weighed down by prolonged depression in Europe, a fast slowdown in the Chinese economy and low oil prices.

The volatility in the global financial market has made matters worse. On top of the devaluation of the yuan and U.S. rate hike, the yen has turned weaker. The widening fluctuation in global currency and equity markets could spill over to the local market. Korea must not let down its guard just because it has ample foreign exchange reserves and a strong sovereign rating.

Seoul must accelerate endeavors to restructure the economy. Tokyo has spent massively to devalue the yen and bolster exports. But it has been relatively slow in realigning the industrial sector and boosting domestic demand. Korean authorities must draw lessons from their Japanese counterpart and focus on reforms in the labor and industrial sector while enhancing market competitiveness.

JoongAng Ilbo, Jan. 30, Page 30