William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."
In Seoul, pali-pali -- meaning "quick, quick" -- is not just a way of life. The frenetic pace at which the place moves is a matter of national pride. Yet even by these standards, many worry the Bank of Korea is moving a bit too hastily for comfort.
Last week, BOK Gov. Lee Ju-yeol signaled an interest rate hike is on the table with a decision about the specific timing coming next month. Global investors were quick indeed to wonder what, oh what, Lee's team is thinking.
Just about every other top-12 economy is locked on ultra-loose-policy autopilot. Even a 5.4% June increase in U.S. inflation from a year ago does not have the Federal Reserve mulling a tightening move. Fed tapering risks are being downplayed.
Yet Lee's contrarian turn is both wise and potentially instructive.
As Japan taught the globe -- and the U.S. is learning the hard way -- central bankers cutting rates to zero and beyond tend to get trapped. Before politicians, bankers, chieftains and investors realize it, so much free money sloshing around actually changes an economy's cosmology. It warps incentives, muddies financial goal posts, encourages bad behavior and fuels asset bubbles.
Worst of all, arguably, overdoing the liquidity takes the onus off elected officials to do their jobs. Imagine if back in 1999, when then-Bank of Japan Gov. Masaru Hayami first went to zero, his team made it clear the policy was temporary. That zero rates are monetary life support. And that by, say, 2001, when economic life returns, short-term rates would move back up to 0.5% or even 1.0%.
The BOJ went the other way, of course. In 2001, Hayami's team pioneered the quantitative easing that has since been adopted everywhere. It had sedated the global economy's animal spirits. Even today, BOJ Gov. Haruhiko Kuroda is under pressure to go even further down the QE path.
This monetary intemperance explains why 10-year Japanese debt yields 0.01% despite the largest public debt among developed nations and the fastest-shrinking population. It explains, too, why 10-year U.S. yields are just 1.32% as Washington's debt nears $30 trillion and inflation heats up.
To keep score, Japan is still stuck deep in the QE matrix 20 years on, and the U.S. for nearly 13 years. The European Central Bank, Bank of England and Swiss National Bank are there, too. So is the Reserve Bank of Australia.
Not the BOK, though. In 2008 and 2009, Lee's predecessor, Kim Choong-soo, stayed out of the QE fray. Since 2014, Lee too resisted the urge to give zero rates a try.
Yet Lee worries that benchmark rates at a record-low 0.5% are too indulgent. In explaining why a rate hike seems in order, Lee points to side effects from a prolonged period of easy money. "We need to cope with financial imbalance by normalizing monetary policy," Lee said last week.
Make that political imbalance, too. Namely, how a prolonged period of low rates enabled a succession of complacent governments.
Since the 2008 global financial crisis, Korea has had three presidents promising bold reforms to raise competitiveness and raise wages. Seeing the difficulty of the tasks ahead, each was happy to defer macroeconomic management to the BOK.
The top item on the to-do list is recalibrating growth drivers. Since the 1960s, the main engine has been giant family-owned conglomerates, known as chaebol. In the decades that followed, a dearth of antitrust enforcement allowed a handful of export-heavy chaebol to concentrate power -- names like Samsung, Hyundai, LG, Daewoo and SK.
Their debt excesses and overexpansion left South Korea top-heavy in 1997 as the Asian crisis devastated the region. In the intervening period, Seoul pledged again and again to generate growth and new jobs from the ground up. No one more so than Moon Jae-in, who assumed the presidency in May 2017.
Yet Moon has been slow to implement his trickle-up growth strategy. COVID-19 disruptions have only made change harder. Only about 12% of South Koreans are fully vaccinated as the delta variant spreads.
Moon Jae-in, pictured during his election campaign rally in Seoul in May 2017: the President has been slow to implement his trickle-up growth strategy.
© Reuters
Against this backdrop, the timing of Lee's tightening plans might strike many as odd, even dangerous. But Lee is trying something neither the BOJ nor the Fed has been willing to do: cut off the government.
Granted, Lee's team has some room for experimentation. The economy is seen growing 4% this year, thanks largely to surging exports. Overseas shipments jumped 39.7% in June year-on-year amid strong demand for cars and semiconductors.
Yet this boom is fanning asset inflation. Soaring home prices are widening the gap between rich and poor. Since 2017, average condominium prices in Seoul have nearly doubled.
Along with capping froth, the BOK is communicating to Moon that it is now the government's move. It is time Seoul made good on pledges to boost innovation, police monopolistic behavior, alter tax codes to the advantage of startups and create safety nets to encourage young risk-takers to reboot Korea Inc.
Asia's fourth-largest economy will get considerably more traction from regulatory overhauls than holding rates artificially low. Lee's team at BOK knows this. The rest of the globe should be watching -- and rooting for -- his contrarian gamble.
