Abenomics: The First 100 Days

Behind South Korea’s Emotional Response to Abenomics

Politics Economy

The South Korean media has published numerous criticisms of Japan’s economic policies under the Abe administration. Economist Fukagawa Yukiko suggests the emotional response is grounded in misperceptions.

Since taking office late last year, Japan’s Prime Minister Abe Shinzō has been pursuing a set of economic policies featuring stepped-up quantitative monetary easing with a 2% inflation target to be achieved within approximately two years, flexible fiscal policy, and a growth strategy centering on the private sector. The coverage of “Abenomics” with these “three arrows” in the South Korean media has been distressingly emotional. The stridency of the tone peaked in February, when a meeting of the Group of 20 concluded with a statement that made no reference to the “beggar my neighbor” effect of currency depreciation (as South Korea had reportedly called for) and instead implicitly accepted Japan’s monetary policies.

In an article published in the Financial Times on January 25, British historian Niall Ferguson noted that in terms of real (inflation-adjusted) effective exchange rates, the biggest margin of depreciation over the past five years has been that of the South Korean won, and he snidely declared, “So the Koreans win this week’s prize for hypocrisy” for their complaints about the weak yen. This met with an impassioned response. A piece that appeared in JoongAng Ilbo on March 19 declared that there was no reason to listen to this sort of “unfair judgment” and that when countries set the value of their own currencies they ought to take other countries’ feelings into account.

Some Korean experts did point out that a cheaper yen is not a problem for Korean companies in fields like mobile phones and electrical appliances, where they have secured substantial shares of the global market already; in fact, it benefits them by lowering the cost of the many parts and materials that are imported from Japan. But these observations became the target of another type of emotional response, namely, the complaint that the policies of President Lee Myung-bak’s administration favored a small number of big businesses and did not help smaller firms. South Korea’s small and medium-sized enterprises operate largely as subcontractors or intermediate goods suppliers subject to the “pressure of unfair trade practices” from the big companies they receive orders from. And the losses that many smaller firms suffered as the result of blindly trading derivatives in an attempt to hedge currency risks are still fresh in people’s memories. So complaints about the sudden weakening of the yen were amplified by a sense of victimhood.

MBnomics and Abenomics 

The essential point underlying the emotional response to Abenomics is that the Korean media identified Abe’s economic policies with those of President Lee Myung-bak (2008–13), which have been dubbed “MBnomics” (where “MB” is short for “Myung-bak”). In particular, they assumed that the purpose of quantitative easing was to drive the value of the yen down so as to promote an export-led recovery.

The chart below shows the movements in the real and nominal effective exchange rates of the yen and the won since the late 1990s. As this indicates, the won’s effective exchange rate against the dollar, both real and nominal, was quite high in the period before Lee Myung-bak became president in February 2008. This was the result of increased capital inflows. And it generated an emotional response within South Korea, where people were saying that the won’s rise would destroy the country’s economy. Faced with such an outpouring, Lee hurriedly moved to bring the won down with measures including lowering of the limit on forward currency positions and imposition of a “balancing surcharge” on foreign exchange transactions, along with repeated interventions in the currency market.

These moves by the Lee administration at one point came under investigation as possibly contravening the code of the Organization for Economic Cooperation and Development on liberalization of capital movements, and the United States repeatedly warned South Korea against market intervention. But then, in the context of the global financial crisis following the collapse of Lehman Brothers and the subsequent sovereign debt crisis in Europe, there was a reversal of the sudden outflow of capital, and the won fell sharply. Fortunately, the crisis was kept under control thanks to South Korea’s currency swap arrangements with other countries, notably the United States, Japan, and China, and the major chaebol enterprises, this time with ample supplies of liquidity unlike in 1997, had their exports boosted by the won’s weakness.

The Lee administration responded to this crisis by further stepping up government support and intervention in the economy. South Korea embarked on fiscal stimulus of a scale topped only by Russia among the major economies, and it moved to ratify free trade agreements with the European Union and the United States. Korea Electric Power Corporation, the electric power monopoly in which the government holds a majority stake, helped Korean industries remain competitive by keeping its power rates unreasonably low—to the point that the deterioration in its business performance led to a shareholders’ suit against its management. Meanwhile, a number of scandals came to light, including a case of stock price manipulation by a bureaucrat in connection with a diamond mine in Cameroon, one of a number of government-led resource development projects. Despite the emergence of these side effects from MBnomics, the Korean media have tended to interpret Japan’s Abenomics as an imitation of the Korean model by a Japan envious of Korea’s success. 

Lee Myung-bak’s 747 Plan

President Lee Myung-bak’s “MBnomics” aimed to promote the growth of South Korea’s businesses and economy through tax cuts and deregulation. President Lee came out with a set of promises dubbed the “747 Plan”: achieve an average annual economic growth rate of 7%, raise per capita national income to $40,000, and make Korea the world’s seventh-largest economy. But social disparities widened as a result of export-led economic growth promoted by a cheaper won and driven by the chaebol business conglomerates, along with the intensification of international competition due to globalization. The country’s terms of trade steadily deteriorated, while unemployment among young people also increased, and social discontent grew. As noted in a piece that appeared in the JoongAng Ilbo on February 8, in MBnomics some part of the Korean economy benefited from five years of a weak currency. The won was at its lowest level against the dollar than at any time except during the currency crisis, and it set a new record low against the yen. This supported exports, but strong exports failed to produce investment or jobs; meanwhile, the weak won generated ongoing inflationary pressure, and the overall performance of the economy failed to match President Lee’s pledge. The average growth rate over the five years of his term was 2.9%.

The photograph shows a gathering of Seoul citizens celebrating the implementation of South Korea’s free trade agreement with the United States. Concluded after several years of negotiations, the bilateral FTA went into effect on March 15, 2012. (Photo courtesy AP/Aflo)

Differing Economic Structures, Growth Strategies

Japan’s economic structure and fundamentals have started to differ greatly from those of South Korea since the global financial crisis. For many years the South Koreans, with the idea of catching up with Japan on their minds, have concentrated their attention on competitiveness in terms of manufacturing—the hardware side of the economy. In Japan, following the appreciation of the yen, the industrial structure has shifted toward services, and manufacturing now accounts for less than 20% of gross domestic product. Japanese manufacturers, even smaller businesses, do a much larger share of their production offshore than their Korean counterparts do. And now that almost all of Japan’s nuclear power plants have been idled, energy imports have ballooned, pushing the balance of trade heavily into the red. This is very different from the picture in South Korea, where the 2010 input-output tables show manufacturing accounting for half of domestic output, and exports 35% of final demand, with a constant trade surplus.

Also, while the yen has weakened, one has a hard time finding any signs of exchange rate management or capital controls or of market intervention by the Japanese government. The objective of Japan’s quantitative easing has been not to weaken the yen so as to boost exports but to halt the erosion of domestic demand as a result of deflation. Western countries, which have adopted similar policies, had no choice but to recognize this fact, and this recognition was reflected in the judgment made by the G20.

The Korean media also tend to see Japan’s proposed participation in the Trans-Pacific Partnership talks as a move to counter the US–South Korea FTA. But of the 24 TPP working groups, only 3 are concerned with eliminating tariffs. And given its low level of export dependence, along with the progress of its manufacturers’ shift to offshore production, Japan cannot naively expect quick results from tariff elimination. Japan’s strategic interests in the pact, aside from agriculture, are in areas other than tariff negotiations, such as the coordination of competition law, protection of investors, and intellectual property rights. The hope is that the TPP will provide a multilateral trade framework protecting the offshore production networks that Japanese manufacturers have built in response to repeated strong-yen phases, and also that it will serve as a source of external pressure that can be used to promote the reform of domestic agriculture and to speed up deregulation and innovation in strategic areas like energy, healthcare, the environment, and culture. Moreover, the great advances achieved by South Korea’s electronic goods manufacturers started around 2005, at which point the won was actually stronger; these companies’ good performance had probably little connection with moves to weaken the won, but with other established areas where the companies are competitive, including managerial innovation and the global marketing capabilities of exporters. This reflects differences in their economic structures, growth strategies, and management.

In addition, needless to say, Japan’s tremendous fiscal deficit makes it impossible for the government to implement bold support measures or intervene in markets the way the Korean authorities did. Rebuilding from the Great East Japan Earthquake is an ongoing burden, and it will be impossible to avoid hiking electric power rates. So Japan’s Abenomics will not and cannot be the same as South Korea’s MBnomics for various reasons. Rather, the differences should foster opportunities for Korea in the end, once the Japanese market starts to grow again.

Implications of the Emotional Criticisms 

The impassioned coverage seen in the Korean media is also a reflection of the contradiction in South Korea’s own growth strategy. MBnomics proclaimed the goal of creating a “global Korea,” but the intellectual framework for the policies remained within the bounds of a “national” catch-up campaign. The media, which depends on the government for information, used expressions like “economic territory” in reference to Korea’s FTA partners, and in sectors like the electric and electronics industry, it boasted that Japan no longer had anything to teach Korea; in the face of the Korean trade deficit with Japan, commentators were at a loss over how to explain the contradiction, and resorted to complaining about the “closed” Japanese market. Previously the media had been publishing stories about the prospects for Korea, in contrast to conservative Japan, to develop into an advanced “hub for international finance”, but when exchange rate fluctuations widened in response to the lifting of foreign exchange controls and the liberalization of capital transactions, the tone in the media shifted to one of shrill complaints about the fluctuations. An international financial hub cannot exist without large-scale capital movements, and countries with floating exchange rate regimes have no choice but to accept fluctuations in their exchange rates.

A calm assessment of the situation would suggest that if Japan manages to overcome deflation and achieve a recovery in demand, South Korea has a good chance of increasing its Japan-bound exports, which, by country, are third to its exports to China and the United States. In addition, since the share of trade between Japan and South Korea that is denominated in yen is relatively high, so a weaker yen can also serve as a medium for fund raising in yen. On a global basis, Japan is supporting South Korea’s resource development projects and plant construction business by providing information network for trading companies as well as international-finance functions—areas in which South Korea is weak. The economic interests of the two countries are globally intertwined, but often complementary, and they are no longer involved in the simple sort of seesaw game depicted by Korean government officials and media commentators.

Impassioned coverage causes policymaking to become clouded by emotions, thereby resulting in self-inflicted damage to competitive strength. Of course, there is much room for greater efforts from Japan—specifically in terms of conveying information promptly and providing appropriate explanations on Abenomics for the interested countries. That said, under a system of floating exchange rates, every country’s government must engage in calm dialogue with the market, and accurate, objective, comprehensive, and unemotional information provides the essential infrastructure for this purpose. South Korea under its new administration should now recognize that this infrastructure is what is required to manage a mature economy. President Park Geun-hye, who has been nicknamed the “ice queen,” is the target of great expectations as she tackles the challenges of her post.

(Originally written in Japanese on April 10, 2013. Title photo: Park Geun-hye stands next to outgoing President Lee Myung-bak at her inauguration ceremony on February 25, 2013 [photo courtesy Aflo].)

TPP Lehman Brothers FTA South Korea Lee Myung-bak Park Geun-hye Abenomics Yukiko Fukagawa MBnomics Joong Ang Ilbo Seoul