For weeks, South Korean Finance Minister Choi Kyung Hwan and other politicians have been demanding that the BOK weaken the won so Korean exporters could better compete with their counterparts in Japan. Which was fair enough: Since mid-November 2012, when Tokyo began devaluing its currency, the won has surged 44 percent against the yen. Yesterday, BOK Governor Lee Ju Yeol finally bowed to the pressure, slashing the central bank’s repurchase rate a quarter of a percentage point to a record low 1.75 percent.<\/p>\n
In some sense, however, South Korea still isn’t taking Japan seriously enough. South Korea should be less concerned about its short-term export woes and more concerned about the prospect of mimicking Japan’s lost economic decades since the 1990s. Unless policymakers act far more aggressively in the near future, they still riska long term state\u00a0of “Japanization,” a semi-permanent deflationary funk that strangles living standards. Here are three ways Seoul can avoid that fate.<\/p>\n
First, it should end its monetary stinginess. South Korea’s high household debt levels — currently at a record $962 billion, or 70 percent of gross domestic product — are said to have dissuaded Lee from cutting rates sooner.<\/p>\n
Second, South Korea should prod companies to raise wages. Beginning this year, South Korea\u2019s family-owned conglomerates, or chaebol, will be subject to a 10 percent tax on excessive hoarding of cash that could be better spent on wages or investments.<\/p>\n
South Korean President\u00a0Park Geun Hye\u00a0could help change this situation by using her bully pulpit to shame companies that underpay workers. She could also push for tax laws that would give those companies financial incentives to hire their part-time staff to full-time contracts.<\/p>\n
Third, South Korea needs to stop obsessing ovre exchange rates. The country needs to become more competitive, but it would be a mistake to pursue that goal solely through depreciation.<\/p>\n
Park seems to recognize that South Korea must learn to thrive even when exchange rates move against it. She has pledged, for example, to build a creative economy that produces new industries, generates good-paying jobs and reduces the dominance of the chaebol. But for too long, South Korea has relied on depreciation to shield the country from creative destruction.<\/p>\n
The BOK’s recent rate cut was the right move for now; in the short term, it should help exporters keep pace with their competitors. But if South Korea wants to avoid ending up in Japan’s economic rut, its ambitions will have to go beyond interest rates.<\/p>\n
Willaim Pesek writes:\u00a0 The Bank of Korea has no shortage of diplomatic ways to explain yesterday’s surprise rate cut, including weak domestic demand, sluggish business investment and anemic exports. But it’s worth being clear what this move was really about: … Continue reading ![\"Interest](\"http:\/\/www.w-t-w.org\/en\/wp-content\/uploads\/2015\/03\/Interest-Rates-in-Asia.jpg\")
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