Opinion

South Korea needs to watch the BOJ rather than the Fed

Due its actual economic structure, South Korea should be more worried about BOJ's extremely lax stance than about monetary policy normalization by the Fed.

By: Date: December 14, 2017 Topic: Finance & Financial Regulation

This opinion piece was published in:

As the South Korean economy has grown to become the fourth largest in Asia, its fortunes have become increasingly intertwined with those of Japan and to be less influenced by the U.S. With Tokyo and Washington embarking on opposite courses in monetary policy, Seoul should be watching the Bank of Japan more closely than the U.S. Federal Reserve.

South Korea’s economy has been one of the best global growth stories of the past four decades. The country has transformed its economic structure, gradually reducing its dependence on industrial production and expanding its technology and services sectors, which now make a bigger contribution to gross domestic product.

Externally, South Korea is becoming less influenced by the rest of the world, according to a recent empirical analysis conducted by the Asia research team of investment bank Natixis. Our study showed that only 27% to 35% of South Korea’s GDP volatility is caused by external shocks compared with 31% to 47% in the 1980s and 1990s.

Even more interestingly, according to the same analysis, South Korea’s reliance on the U.S. seems to have fallen relative to the influence of Japan. In particular, the monetary policy of the BOJ has become more important for the South Korean economy than that of the Fed.

This is particularly true in the long run: The BOJ accounts for 60% of South Korea’s externally driven output volatility over the long run — one to five years — compared with 40% for the Fed. In the short run — up to a year — the BOJ and the Fed are equally relevant to South Korea’s output volatility. This is in sharp contrast to the 1980s and 1990s, when the Fed was twice as important for South Korea’s business cycles as the BOJ.

These findings may seem counterintuitive given that exports to Japan have declined to 4% of overall South Korean exports from 22% in 1989. Shipments to the U.S. now represent 12% of South Korean exports, down from 32% in 1989.

Overlapping markets

Japan also has a significant indirect influence on the South Korea economy because of the increasingly similar export structures of the two countries which have made them direct competitors in many third-country markets.

This is particularly true for telecommunications and electrical machinery. In these sectors, the degree of competitiveness compared with the global average is very high. One way to measure this is to calculate South Korea’s and Japan’s “revealed comparative advantage” by sector, which gives an indication of the degree of specialization and competitiveness in each industry.

In these sectors, both South Korea and Japan have ratios well above one, which is considered the minimum benchmark for a country to have a relevant comparative advantage. The data thus confirms that South Korea and Japan are world leaders in telecommunications and electrical machinery and compete with each other for global market share.

In the same vein, financial links between South Korea and Japan have strengthened substantially in the past few years. Japanese banks have become important lenders to South Korean financial and nonfinancial institutions, reaching 20% of the country’s total bank borrowing, double the level in 2005.

That South Korea is becoming less dependent on the Fed is particularly obvious in the light of current expectations of further monetary tightening in the U.S. In the past, such expectations would have led to heightened volatility in South Korean financial markets, but our findings point to a much more muted impact this time.

The same is not true of the potential impact of monetary policy changes in Tokyo. The fact that the BOJ is ready to continue with its qualitative and quantitative easing programs notwithstanding the Fed tightening should be raising eyebrows in South Korea.

The widening monetary policy divergence between the Fed and the BOJ can only harm South Korea. It is likely to result in a weaker yen and thus more effective Japanese price competition against South Korean products in global markets.

In sum, South Korea should be more worried about BOJ’s extremely lax stance — and the consequences of the falling value of the yen — than about monetary policy normalization by the Fed.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to communication@bruegel.org.

View comments
Read article More on this topic More by this author

Podcast

Podcast

Backstage: Japan’s inflation problem and monetary policy options

Bruegel senior fellow Zsolt Darvas welcomes Sayuri Shirai, professor at Keio University, visiting scholar at the Asian Development Bank Institute and former Member of the Policy Board of the Bank of Japan (BOJ), for a discussion of the Japanese monetary policy outlook. 

By: The Sound of Economics Topic: Global Economics & Governance Date: October 26, 2018
Read about event More on this topic

Past Event

Past Event

Asia-Europe Economic Forum 2018 - Public

This year's Asia-Europe Economic Forum (AEEF) will be held in Brussels on 17-18 October

Speakers: Chung Chul, Xie Fuzhan, Matthias Helble, Jyrki Katainen, Jin Keyu, Jae-Seung Lee, Erik van der Marel, Yoichi Otabe, Jean Pisani-Ferry, Rintaro Tamaki, Amb. Karsten Warnecke and Guntram B. Wolff Topic: Global Economics & Governance Location: Solvay Library, Rue Belliard 137, 1000 Bruxelles Date: October 18, 2018
Read article More on this topic More by this author

Podcast

Podcast

Backstage: The new balance of Asia-EU-US trade relations

Amid the Asia-Europe Economic Forum on the fringes of the 12th ASEM Summit, Bruegel senior fellow hosts a conversation on developing global trade relations, with guests Moonsung Kang, professor as Korea University, and Michael G. Plummer, director at SAIS Europe – Johns Hopkins University, for an episode of the Bruegel Backstage series on ‘The Sound of Economics’.

By: The Sound of Economics Topic: Global Economics & Governance Date: October 17, 2018
Read about event More on this topic

Past Event

Past Event

Asia-Europe Economic Forum 2018 - Closed-door

This year's Asia-Europe Economic Forum (AEEF) will be held in Brussels on 17-18 October

Speakers: William Becker, Franco Bruni, Zsolt Darvas, Andreas Esche, He Fan, Michael G. Plummer, Thomas Grjebine, Gao Haihong, Kiyoto Ido, Sébastien Jean, MA Jun, Moonsung Kang, Stefan Mair, Yung Chul Park, Choonsung Park, Sayuri Shirai, Guntram B. Wolff and Naoyuki Yoshino Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: October 17, 2018
Read article More on this topic

Blog Post

The higher yield on Italian government securities could soon be a burden for the real economy

The increase in the spread between Italian (BTP) and German (Bund) government securities is directly an additional burden for Italy public finance, and thus for tax payers. But it could soon also become a burden for the real economy, as the increased yield on Italian government securities could pull up the cost of bank loans for Italian firms, thus imparting a deflationary impact onto the economy.

By: Francesco Papadia and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: September 10, 2018
Read article More on this topic More by this author

Podcast

Podcast

Backstage: Next steps towards banking and capital markets union in Europe

Bruegel senior fellow Nicolas Véron talks with Jörg Kukies, state secretary at the German finance ministry, about the next steps to the banking union project in Europe, as well as the potential challenges that lie ahead.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: September 4, 2018
Read article More on this topic More by this author

Blog Post

Italy’s capital flight: 2011, 2016, and early 2018

International investors have been repositioning vis-à-vis Italy, after the new government took office in early May. We compare this summer turmoil to previous episodes of capital outflows. Outflows from Italian portfolio investments in May and June have exceeded the outflows recorded during the summer of 2011, and are already halfway to matching the cumulated total outflows recorded during the entire 2011-12 crisis.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: August 31, 2018
Read article More on this topic More by this author

Blog Post

The Turkish Crisis

Financial markets have been very nervous about Turkey for the past few weeks. We review economists’ opinions about the economic, political and geopolitical risks and opportunities of this situation.

By: Silvia Merler Topic: Global Economics & Governance Date: August 27, 2018
Read article More on this topic

Blog Post

Completing Europe’s banking union means breaking the bank-sovereign vicious circle

Several euro area leaders, including the German chancellor, her finance minister, and the French president, have recently referred to the need to “complete the banking union.”. These public calls echo those made in more formal settings, and inevitably raise the question of what criteria should be used to assess the banking union’s completeness.

By: Isabel Schnabel and Nicolas Véron Topic: Finance & Financial Regulation Date: May 17, 2018
Read article Download PDF

Policy Contribution

Making a reality of Europe’s Capital Markets Union

It is high time to make the CMU project real.The authors of this publication suggest that capital markets will only transform with concrete action and that ESMA reform should be a priority but cannot be the only one. Policymakers need to set priorities that will move the project forward.

By: André Sapir, Nicolas Véron and Guntram B. Wolff Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: April 27, 2018
Read article More on this topic

Opinion

China's “matryoshka” approach for debt-to-equity swaps could be good for banks, but bad for investors

The Chinese banking sector has enhanced its clean-up mechanism by introducing debt-to-equity swaps for the resolution of problem loans. While this allows banks to offload their stressed assets at a very low cost, it does not prevent banks’ exposure when we look closer at the so-called "state-owned funds" who are shareholders in the debt-to-equity swaps.

By: Alicia García-Herrero and Gary Ng Topic: Finance & Financial Regulation Date: March 8, 2018
Read about event More on this topic

Past Event

Past Event

The era of financial interconnectedness: how can Asia strengthen financial resilience?

How can increased regional cooperation in Asia safeguard financial stability and promote financial resilience?

Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 1, 2018
Load more posts