Don’t Fear Abenomics, Korea

A few weeks ago in the JoongAng Daily, I co-authored the following editorial. (My co-author is one of my finest students, who can be found here on Twitter.) The temperature is rising in Korea on Abenomics. The government is coming out strongly against it, but I still think the basic arguments we present below are undamaged.

In brief, Abenomics is important because Japan is the world’s third largest economy and therefore systemically (i.e., globally) important (Korea is not; it’s too small). So Japan’s reflation is about a lot more than just Japan; it impacts the region and the globe. Also, the Korean won is ridiculously undervalued and the Bank of Korea has itself gimmicked the won exchange rate a lot in the past, so it’s not exactly fair for Korea (or China, who is even worse) to complain. Finally, in the medium-term, a functioning Japan is far more in Korea’s interest than Korea’s nationalist japanophia will allow anyone here to admit. That is a shame. I’ve argued this a lot, but no one listens.

So bring on the K-hate-mail, but please do recall that I have already rejected Abe the nationalist. Koreans are absolutely right about the comfort-women and Yasukuni. But Abenomics is not about history; it is a last-ditch, throw-everything-including-the-kitchen-sink effort to get Japan on its feet again so that it can prevent Chinese primacy in Asia. Keep your eye on the big picture of South Korea’s interest, and a few lost sales of Samsung TVs to Canadians pale in comparison.

Just to avoid referencing Abe again – he’s become such a lightning rod in Korea – the picture is Hiruhiko Kuroda, the (awesome) governor of the Japanese central bank. (Someone form the Bank of Japan really ought to be put in charge of the IMF one day soon.) I’d like to think Kuroda’s hand reference in the pic means he wants to dectuple the Japanese money supply. Hah! – ‘Just wait a year, PM Abe, and I will chop down every tree in Japan and print so much cheap yen, that we’ll wallpaper our houses with it!’ Think of Kuroda as the flip side of Paul Volcker. If Japan’s economy weren’t such a mess, it’d actually be kinda funny. But honestly, let’s all – Koreans included – hope Abenomics works.

“Shinzo Abe has announced a major monetary expansion, or ‘quantitative easing,’ that seeks to boost Japan’s inflation rate to 2%. This has met considerable skepticism in Korea. Korea’s exporters worry that an inflationary, depreciating yen will reduce competitiveness. There is some truth to this. As the Bank of Japan prints more yen (inflation), the value of each yen in foreign currencies, including the won, should decline. This should help exports. Nevertheless, the effect is less than Korean exporters fear; the BoJ is explicitly avoiding the purchase of foreign assets to prevent dramatic depreciation. And the clear goal of ‘Abenomics’ is not radical depreciation, but a re-ignition of Japan’s struggling economy after a quarter-century of stagnation. This is a goal Korea should support for five reasons:

First, ‘Global Korea’ must be globally responsible. Korean elites regularly insist that Korea is a weighty player in the global economy. It is in the G-20; its GDP is in top fifteen. So here is a chance to prove it – for with such position comes responsibility as well as prestige. If Korea really wishes to be a central actor in global governance, it must act with larger interests in mind, not simply for short-term nationalist or chaebol goals. Japan is the world’s third largest economy. Its success is of tremendous systemic importance. Much of the world’s financial press and institutions, including the IMF, support Abenomics, because they know how important it is for the global economy that Japan get back on track. Korea should not stand in the way to protect export sales; the issues are much greater than that. This is a test of Korea’s economic maturity.

Second, a growing Japan can be an export destination for Korea. Korea clearly takes some Schadenfreude at Japan’s troubles. This is understandable given post-colonial resentments. But such short-term ideological satisfactions should not blind Korea to the obvious economic benefits of a healthy, functioning Japan right next door. Both Japan and Korea are trading economies. Both have an affinity for automobiles, electronics, pop music, and so on that would make them an ideal free trade zone, much like Canadian-American economic integration. In the medium- and long-term, a growing Japan is good for Korea’s own growth.

Third, a stronger won is in fact in Korea’s interest. Too much of the Korean conversation assumes that what is good for Korean exporters is good for Korea. But this is not so. Samsung and LG are not Korea; they are just firms. While a cheap won does help their sales, there is a mathematically necessary flipside: imports in Korea are expensive, because the won is weak. This may suit the chaebol, but that is not in the interest of Korean consumers or small and medium enterprises who consume imports. Korea’s high prices, due to meager import competition and a weak currency, are consumer-unfriendly. The result of weak won purchasing power is far too many Koreans in deep personal debt to fund consumption. Korea’s problems with credit card debt, ‘rush-cash’ shops on TV, and the highest debt-to-income ratio in the OECD (155%) stem directly from the weak won. If Japanese products in Korea decline in price, that will help Korean consumers by offering cheaper alternatives, while simultaneously compelling Korean companies to lower prices and/or improve quality. This is a victory for the long-suffering Korean consumer.

Fourth, Japan is the lynchpin of the US Asian security umbrella that protects Korea. Koreans dislike the notion that Japan is the primary US ally in Asia, but this is so. Korea, Taiwan, Australia, and others simply do not rival the centrality of Japan to the American position here. Should Japan continue its descent into stagnation, it would endanger the larger American ‘pivot’ to Asia. Unless Korea is prepared to pay substantially more for its own defense and stand increasingly alone against China and North Korea, for security reasons alone, Korea should support any effort to reflate Japan. A Japan fearful of national decline and terrified of rising China is most definitely not in Korea’s national interest, however much emotional Schadenfreude Koreans may take from such a prospect. Such a Japan is far more likely to succumb to Chinese dominance in Asia, drawing a separate peace with it and eventuating a US withdrawal from Asia altogether. Only a normal, reasonably healthy Japanese economy can be a bulwark against Chinese primacy in Asia and an anchor for the US Asian presence so critical for Korea’s own security.

Fifth, a normally growing Japan is far more likely to deal calmly with Korea on history and territory, and far more likely to contribute to post-unification reconstruction costs. Once again, Korea’s medium- and long-term interests are disserved by a selfish, short-term view lets chaebol exports and an emotional disdain for Japan drive Korean foreign policy. A central Korean concern is that Japan deal in good faith, with open historical eyes, on divisive issues. We concur. But Japan is likelier to accommodate Korean concerns if it is growing normally and is reasonably positive about its future. Countries struck by crisis and fear empower extremists promising radical answers to intractable problems. In Greece, the brutal euro-recession has brought nazis and communists into the parliament. It is in fact quite impressive that Japan has not drifted toward radicalism after so many years of confusion. If Korea wishes Japan to come around on questions of history and territory, a calmer, healthier, more normalized Japan is a prerequisite for the domestic social liberalism necessary for concessions to Korea on these questions. Similarly, Japan is likelier to contribute to the huge costs of unification if it is growing normally and Korea is not perceived as an opponent who blocked Japan’s return to growth.

We realize this analysis may be unwelcome in Korea, where the temptation to indulge ideological satisfaction over Japanese decline is strong, and where mega-exporters like Samsung have inordinate voice over exchange rate management. And we are not arguing for a return to Japanese super-growth of 40 years ago. Rather we believe Korea’s medium- and long-term interests are well-suited by a moderate, normalized, temperate Japan; that will not happen if Japan continues to stagnate.”

Filed under: Economics, Japan, Korea (South), Media