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Why Korea will not be "the next Japan"

Why Korea will not be "the next Japan": It can avoid making the same missteps

* Korea's economy has grown 1,800% since 1980 - more than three times the global rate

* But there are concerns that Korea may suffer similar problems to Japan

* We think Korea will avoid making the same missteps, but more reforms are needed

Korea is the envy of aspiring industrial nations. Its economy has grown 1,800% since 1980, over three times faster than the global rate. Now the 15th largest economy in the world, Korea is the first non-European OECD member to switch from being an aid recipient to becoming a donor.

Despite this, there are concerns that its growth model is too similar to that of Japan, which has experienced two lost decades of deflation and weak growth since its asset bubble burst in the late 1980s. We argue that there are three reasons why Korea will not become "the next Japan":

* Asset bubbles: Unlike Japan during the bubble era, the growth of equity and property prices in Korea is contained; this means domestic demand is unlikely to suffer a negative shock.

* Deflation: Demand for Japan's goods was driven by domestic consumers; demand for Korean goods is global.

* Declining global competitiveness: Japan's share of global exports has declined since 1986. Korea's share continues to rise and its exporters are well-positioned to benefit from growth in emerging markets.

But there's no room for complacency. Korea's policy makers need to implement reforms and lift the economy's potential growth rate from 3.4% back to around 4%. These reforms include: raising financial transparency, normalising the policy rate when growth conditions warrant, and attracting more foreign workers. Luckily, experience and time are on Korea's side. If the country can learn from Japan's missteps, then its economic outlook should be much brighter than that of its neighbour and rival.


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