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On the Possibility of the Korean Economy’s Falling into Japanese Style Long-term Recession

Author Kang, Du-yong et al. Date 2015.04.13 Issue No 610
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○ Amid heated debates over secular stagnation in advanced countries, concerns were raised that the Korean economy might fall into Japanese style long-term recession as both countries are similar in terms of changes in population and economic structure.

○ There were multiple factors that resulted in Japan’s long-term slump, such as balance sheet recession after the big bubble burst, policy failure of the Japanese government, and a population decrease with rapid aging.

 

○ The greatest risk factors for the Korean economy following the footsteps of Japan are demographic changes and household debt.
- Following Japan about two decades apart, Korea’s working age population and total population are expected to start declining around 2017 and 2030 respectively. As a result, the economic growth is expected to slow down to less than 3% during 2015~2020 and below 2% after 2020, which again might lead to a sharp decrease in investment growth through acceleration effect.
- Household debt seems to be already undermining consumption and it could lead to a persistent stagnation in consumption and domestic demand through principal and interest burden as well as deleveraging in the future, even without undergoing a bubble burst as Japan did.
- In particular, there is concern that the adverse effect could be magnified as the Korean economy is likely to face a drop in the economically active population and household debt deleveraging at the same time.

 

○ Unlike Japan which fell into the long-term recession after experiencing the bubble collapse and economic plunge, Korea’s economic downturn might gradually intensify and last for a long period of time due to demographic changes and household debt burden.

 

○ To prevent Japanese style recession, managing household debt risks is the most important, and efforts should also be made to more actively address problems of low fertility and an aging population, create new frontiers by taking measures such as expanding inter-Korean economic cooperation and boost domestic demand.