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Inho Song examines aging as a structural factor affecting housing prices. His long-term price model, using a model of demographic structure by age group, simulates the trend of housing prices, assuming that Korea’s housing market may experience aging similar to Japan’s over the next 20 years. Results show a downturn from 2019 (annualized growth rates of –1 to –2 percent) in real housing prices, but a rise in nominal ones (by an annual average 0.4 percent), even with effects of population aging. Results are consistent with the lifecycle hypothesis and overlapping generation models, in that aging has a direct impact on asset prices. Korea’s housing market has not yet experienced the aging effects that Japan’s has. Inflation in housing prices will be the factor deciding whether population aging effects on the housing market in Korea will be similar to those in Japan.
Jerry Schiff and Ikuo Saito
Recent global economic stagnation has stimulated debate about the role of fiscal policy in supporting growth, notably through infrastructure spending. Japan’s experience during its “Lost Decades” provides insights on maximizing the impact of fiscal policy during downturns. First, while Japan provided early and effective fiscal stimulus, later fiscal policy was conducted in a “stop-and-go” and often pro-cyclical manner. Second, a shift in spending away from infrastructure toward transfers reduced the overall fiscal multiplier. Third, a decline in the efficiency of public investment—partly reflecting weaknesses in fiscal institutions—also reduced the impact of fiscal policy. Fourth, the concurrent dramatic shift in demographics reduced potential growth and limited fiscal space, so that fiscal policy was fighting against a strong tide. Avoiding similar problems can help countries design effective fiscal policy responses in the current economic environment.
There is little agreement about deflation as a problem for economic growth and financial stability. Economists may question it as a transitory phenomenon or whether monetary policy can solve it without more serious risks. Historical experience generally confirms that it should be a central-bank priority and does not solve itself. Once deflation is under way, monetary policy can return inflation to positive target levels. If that is not achieved, banks need to do more. If doing more threatens financial stability, macroprudential tools are appropriate. If a central bank runs out of government securities to buy or worries about liquidity in the government bond market, there are other assets to buy. If it worries about purchasing other assets, a helicopter drop of money is an option. If that drop targets productive public infrastructure investments, they not only can proceed without increasing public debt but also can actually reduce it.
Exploring the Causes and Remedies of Japanization
Edited by Dongchul Cho, Takatoshi Ito and Andrew Mason
Kyu-Chul Jung examines how Korea’s export market today resembles Japan’s since the 1990s and faces increasing competition from China. In the 1990s Japan lost export market shares as Korea began to catch up, but China began to catch up with Korea in the late 2000s. The old strategy of exporting the same goods as advanced countries is not sustainable. With its limited resources, Korea needs to concentrate on exports where it has a comparative advantage, to undertake structural reforms (dealing with insolvent enterprises and improving labor-market flexibility) and to develop new export markets. Korea needs to focus on core capabilities, so that China and other latecomers cannot easily emulate Korea’s technology and market strategy.
Mitsuhiro Fukao examines Japan’s zombie banks since the early 1990s. The causality of these severely undercapitalized banks runs as follows: increasing loan losses from bankrupting borrowers weaken banks’ capital base; undercapitalized banks start to hide losses and provide evergreening loans to loss-making firms; and undercapitalized banks as well as firms continue to operate with deposit taking by zombie banks under forbearance of regulators. The most important factor during Japan’s worst financial crisis (1997–2003) was the loss of confidence in the accounting and auditing system. Unreliable financial statements resulted in a vicious cycle of credit contraction and impeded the functioning of the market economy. Close relationships among bankers, regulators and accountants impeded quick resolution by allowing nonviable banks to hide loan losses. Complex debtor-creditor relationships among related companies make it difficult to ascertain the scale of the bad-loan problem. The most adverse effect is the increased risk of financial crisis.
Kyooho Kwon examines how Korea’s demographic structure resembles Japan’s, with a 20-year lag, and how productivity growth and solving structural problems are key to maintaining dynamism in the Korean economy. Japan’s “lost decades” and lethargy in Korea’s economy lead some Korean economists to worry that Korea may follow in the footsteps of Japan, with its declining growth rate. Japan’s stagnant total factor productivity growth depressed the demand for labor and capital; and the slower growth rate of the working-age population imposed a constraint on labor supply. These factors together caused the marginal product of capital to fall, dampening the demand for additional capital stock and impeding GDP growth potential. Korea’s demographic structure is evolving in a pattern similar to demographic change and unprecedented aging in Japan and is already playing a role in economic slowdown.
Daehee Jeong examines the increase in Korea’s zombie firms, in the context of Japan’s experience of negative effects on employment, investment, productivity and overall dynamics of the economy. Korea’s delay in corporate-sector restructuring led to an increase in zombie firms, making zombie lending to distressed firms more severe in Korea than in most developed countries. The increase is attributed largely to maturity extensions by banks, rather than to interest exemption by general creditors. Korea’s zombie lending is driven not by insolvent commercial banks but by public banks. One remedy is thus to address their politically directed lending, which has increased exposure to large firms, and instead to restore their role in supporting sectors where the financial market fails, such as small and medium-size enterprises and newly established firms. In addition, the Financial Supervisory Service should ensure that standards for classifying bad loans are consistent across commercial and public banks.