IN 1989, AT At the peak of Japan’s economic growth, very few people suggested that the country could one day become the richest nation in Asia. Per capita, South Korea was not even half rich. But then strong stocks and land bubbles appeared in Tokyo, starting several “lost” decades for the Land of the Rising Sun. Meanwhile, South Korea’s economy has improved. By 2018 GDP Per capita, consistent for purchasing power, tops Japan.
The similarity between the two economies extends beyond the transformation of income levels. Both created their assets during a period of export-led growth. Now South Korea’s working-age population is shrinking, as Japan did after the mid-1990s. The most unpleasant echo of the financial risks that emerged in Japan in the late 1980s and what is growing in South Korea today. They too could hold Asia’s most powerful tiger in turmoil for decades.
Expensive housing has become a major issue in South Korea’s tight presidential election, which is set for March 9. The two front-runners – Lee Jae-myung of the ruling Minzu party and Eun Seok-yul of the center-right People’s Power Party – have clashed over housing policy throughout the campaign.
The outgoing government’s repeated attempts to rein in the property market, stricter debt-to-value restrictions on mortgage lending and the imposition of higher taxes on multiple homeowners have had little effect. Low interest rates and an older population are looking for rental income as it proves to be a strong force as it comes closer to retirement. In the Seoul metropolitan area, about half of South Korea’s 52 million people, property prices have nearly doubled in the last ten years.
There are no definite boundaries beyond which the value of all land in a country, relative to the size of its economy, suggests that asset prices are volatile. But South Korea’s ratio is both higher than international standards and higher than the country’s recent history. It now runs its fivefold GDPAlmost four times more in 2013. At the top of Japan’s folly, the value of all land has risen 5.4 times GDPBefore the collapse of the 1990s.
It would be less dangerous to prick South Korea’s apparent bubble if liability did not increase with the value of the assets. The people and organizations of South Korea are borrowing at a frantic pace. In September last year, the country’s household debt stood at 106 percent GDP, Compared to 58% in Germany and 79% in the United States. Non-financial corporate debt runs up to 114%, which is higher than the average of developed economies.
It’s reminiscent of 1980s Japan, and not in a good way. Richard Ku of the Nomura Research Institute in Tokyo has warned of a possible “balance-sheet recession.” In the boom years of Japan, asset prices and liabilities have grown together. When its land-and-stock bubble bursts, the value of the assets breaks down, but the borrowers still have to pay the same liability. This has put them in a state of negative equity. As companies and households all rushed toward delivery, the economy contracted. “Personally, they were doing the right thing. Collectively, they were destroying the economy, “said Mr Ku.
In 2020 IMF Flagged that South Korea was just one accident away from the damaging balance-sheet recession. Although lending to subprime borrowers was limited, it noted that about half of South Korea’s household debt was either linked to a floating interest rate or required to repay a large lump sum, meaning it needed to be refinanced at potentially higher interest rates. It also noted that many small- and medium-sized companies in the country, relying on short-term bank loans backed by property securities, appeared open.
What happened to the terrible accident? South Korea was one of the first major economies to raise interest rates during the epidemic and has now done so three times. Most analysts expect austerity to continue: The central bank says it is concerned about both the risk of financial stability and rising inflation and rising asset prices. Again, it has a taste of the 1980s: Japan’s problems began when the central bank began to raise rates rapidly to pop up the country’s wealth bubble.
Bank of Korea’s policy of “leaning against the wind” has a snowballing effect that could be difficult to stop, as Nomura’s Jeong Wu Park said. As a result of tight credit controls introduced to lower property prices, mortgage interest rates are rising faster than benchmarks. After crossing pre-epidemic levels, they flirted with decade-highs in January.
There are parallel limits. Japan’s financial institutions were notoriously poorly regulated, leading to a series of crises in the 1990s that left policymakers constantly wondering at the extent of the damage to the financial system. South Korea’s unusual Jones credit system, through which families borrow to pay off a handful of rents, makes it difficult to assess how risky family debt really is.
But scary similarities will continue to grow as South Korean politicians, central bankers and regulators try to engineer a smooth ending of asset price explosions. They have to learn from the Japanese experience. Understanding the worst case scenario, however, may prove easier than avoiding it. 3
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This article is published in the Finance and Economics section of the print edition under the title “Kindred Seoul”