Korean Economic Diagnosis
Deputy Prime Minister and Minister of Strategy and Finance Choi Kyung-hwan said late last month that the Korean economy was about to enter a Japan-style deflation. The remark spread fears of the impending deflation.
But economists have shown split opinions as to his remark. “The current situation of the Korean economy is very similar to that of Japan between 1992 and 1993,” said Oh Jung-kun, head of the Asia Finance Society, adding, “The Deputy Prime Minister’s diagnosis is accurate.” Japan showed signs of extended low growth in 1992, when the inflation rate reached 1.7 percent and the economic growth rate fell to 0.8 percent. Two years later, the percentages were 0.7 percent and 0.9 percent, respectively. Since then, the Japanese economy has been mired in deflation. “The real estate price is signaling deflation these days, and the Korean economy will be in trouble unless it deals properly with this problem,” Korea Development Institute (KDI) Senior Economist Jo Dong-chul added.
On the other hand, some experts comment that deflation is still far away. “Slow growth is causing low prices only in the current phase, and low prices have yet to trigger low growth,” Hyundai Research Institute analyst Lee Jun-hyup mentioned, continuing, “It is true that the current situation is quite similar to Japan’s during the early 1990s, but we are much better now.” LG Economic Research Institute Senior Researcher Kang Jung-koo echoed by saying, “It is stretch to say that the Korean economy is in deflation although the prices and growth are slow as is the case with the national demand due to rapid aging and household liabilities.”
Some say rather that the Korean economy is in disinflation, not deflation. Disinflation, in a broad sense, means the consumer prices falling consistently within a positive range. “Disinflation would be a more appropriate diagnosis in that the consumer price index remains at around 1 percent for approximately two years and below the central bank’s target for more than two years,” said KAIST Business School professor Jung Ku-hyun. He added, “The most fundamental cause is the slowdown of economic activities, which has resulted in a price cut by companies and eventually low prices, and the stabilization of raw material prices and appreciation of the won are also adding to it.”
Japan experienced disinflation before deflation, too. The consumer price inflation rate fell from 1.7 percent to -0.1 percent between 1992 and 1995. Although it rose to 1.9 percent in 1997, it dipped again below 0 percent in 1999.