South Korea is confronting a new kind of crisis: deflation. Consumer prices fell for the first time on record in September, declining 0.4% year-on-year. This came alongside a 12% fall in exports, the 10th straight monthly loss for the engine of gross domestic product.
The price decline is modest so far, but the trajectory is as unmistakable as it is worrisome. U.S. President Donald Trump may be attacking China with his tariffs and bluster, but Korea is taking some of the biggest hits.
It is also a prime example of how complacency is a developing nation's worst enemy, even if Korea resembles high-income OECD countries more than the "developing" label suggests.
For the last 10 years, economists have feared the worst for Asia's fourth-biggest economy -- to no avail. In 2008, Korea confounded short-sellers convinced it would crash during the global financial crisis. It beat the odds during 2013's "taper tantrum" when the U.S. Federal Reserve tried to wind down its massive involvement in the bond market. And in 2018, it enjoyed safe-haven status as the trade war ravaged markets.
Yet policy paralysis means the decade ahead could be worse for Korea's 51 million people than the last 10 years. Deflationary pressures are a symptom, not a cause, of the malaise bedeviling President Moon Jae-in's nation. That owes much to three successive governments doing little to restructure an economy running low on momentum.
The odds the Bank of Korea will cut interest rates to kick-start the economy are rising fast. The BOK eased in July, the first downward step in three years, to 1.5%. Governor Lee Ju-yeol's team may ease again as soon as October 16.
As Japan demonstrates, however, monetary easing is not enough. This is an all-hands-on-deck moment as Korea risks sliding deeper into the kind of funk Tokyo is still struggling to escape 20 years on.
Japan's example matters because Korea modeled its economy after its larger neighbor. Since late 2012, Prime Minister Shinzo Abe has promised a supply-side shake-up: he pledged to reduce bureaucracy, rekindle innovation, empower women and unleash a startup boom. Moon, significantly, promised to check these same boxes when he moved into the presidential Blue House in May 2017.
So had immediate predecessors Lee Myung-bak and Park Geun-hye. All three took office pledging to "democratize" growth. That is code for prodding giant exporters to share profits with workers and to support smaller enterprises. The latter priority is central to reducing the outsized role of family-owned conglomerates, or "chaebols."
Lee, a former CEO of Hyundai Group's engineering and construction business, protected the status quo. Park, whose father created the chaebol constellation as president in the 1960s and 1970s, got co-opted by the chaebols -- and then impeached. She is serving a 25-year sentence for a bribery scandal involving the biggest chaebol, Samsung.
Moon won the presidency promising to wrestle powers away from behemoths -- Hyundai, Samsung, SK, Daewoo and others -- but he has put few wins on the scoreboard.
He is even scaling back on the biggest: a minimum wage hike. The 16% increase in 2018 was the biggest since 2001. This year, it rose another 11%. But the 2020 boost will be just 2.9%, dashing hopes Moon will get the average minimum wage to 10,000 won ($8.31) per hour by 2022.
Even the BOK's interest rate cut did not help, since it is facing a dilemma economists call "pushing on a string." This is when pessimism among companies and consumers overtakes central bankers' ability to increase demand for credit.
The Bank of Japan's rate has been near zero since 1999 and despite that consumer prices are barely rising. Negative rates since 2016, meantime, are backfiring. A resulting drop in profits has banks hoarding government bonds, not lending.
The BOK could adopt an inflation target above the current 2% -- perhaps 2.5%-3.5% -- allowing it to justify acting more boldly and creatively. But the ball is really in Moon's court.
Raising minimum wage ambitions would help. So would a bigger fiscal stimulus jolt: the 9% spending increase Moon requested for 2020 is not enough to boost the 1% growth rate Korea produced in the second quarter. That followed a 0.4% contraction in the first.
Moon needs to get serious about tax tweaks. He can make good on his "trickle-up growth" plan by incentivizing startups with tax holidays. Supporting the development of a bigger venture capital industry also would reap dividends.
Seoul should target the top of the food chain by taxing companies hoarding hundreds of billions of dollars of cash. That would force Korea Inc. to fatten paychecks and invest in new industries. Incentives also could help reorient these companies toward the domestic services sector and away from exports.
If Japan had taken these steps 10 years ago -- or even since 2012 -- it might not be skirting recession once again. Korea faces a choice: do better than Japan or resign itself to a lost decade.
William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."