Korean Economy, a Replay of Japanese Recession in the 1990s?

A warning has been given to the Korean economy regarding a long-term recession similar to the one Japan suffered, as the Korean economy is facing a recession caused not by external shocks, but by internal problems.

In this month`s issue of Nara Economy Monthly, research commissioner Lee Kyung at Hyundai Research Institute stated, "Although the real estate bubble and financial insolvency problems in Korea are not as serious as those of Japan`s, Korea’s economy resembles that of Japan`s back in the 1990s, which may lead to a long-term depression."

He also said, "Monetary stringency that surfaced with the burst of the real estate bubble was the main cause of Japan`s long-term depression of the 1990s," and pointed out, "The current Korean economy has great resemblances with the early days of Japan`s depression and is facing problems that precede a long-term depression."

The Korean economy is showing typical patterns of a long-term depression including: diminishing consumer and investor confidence despite a surplus in trade balance, frozen economic activities in construction caused by measures to curve real estate speculations, signs of long-lasting sluggishness in consumption and hollowing-out of the manufacturing business, low-interest rate recession, and ineffective macroeconomic policies.

The report also states that the Korean economy is also showing similar phenomena that led Japan into a long-term recession like limitations of government-led economic growth, the discrepancy of production in export markets and domestic markets, poor progress in developing new technologies, and failure by the Japanese government in providing appropriate countermeasures.

Mr. Lee said, "The fundamental cause, in most part, of Korea`s economic recession is the psychological problem that comes from many looming uncertainties," and added, "Labor-management disputes, restrictions against businesses, the controversy over relocation of the capital, and untimely policy decisions delayed by unproductively prolonged political strifes are only augmenting economic uncertainties."

He then went on to suggest, "The first step in bringing economic recovery is to restore the confidence of various economic players," and added, "The government must take the initiative by using strong leadership to dissolve policy-related uncertainties and should focus on the fundamental problems of the Korean economy that would accompany the measures employed to stimulate the economy, such as the problems of credit delinquency and slowed spending in capital expenditures, rather than being hung up on short-term problems.”

Yong Park parky@donga.com