Construction-Driven Growth Could Inflate Debt, Bank of Korea Warns (Yonhap)
SEOUL, Oct. 27 (Korea Bizwire) — Relying too heavily on construction investment to stimulate South Korea’s economy could backfire, the Bank of Korea cautioned in a new report, citing Japan’s decades-long struggle with sluggish growth after its asset bubble burst.
In a study released Sunday titled “Lessons from Japan and China’s Prolonged Weakness in Construction Investment,” the central bank said Japan’s aggressive, construction-driven stimulus policies in the 1990s led to rising public and household debt while failing to deliver a sustainable recovery.
Following the collapse of its bubble economy, Japan announced more than a dozen stimulus packages focused on roads, railways, ports, airports, and dams. The government also encouraged home purchases with tax incentives and expanded mortgage lending through state-backed institutions, a push amplified by low interest rates and strong demand from the baby boom generation.
“Over the long term, construction-focused stimulus produced limited economic benefits and instead worsened fiscal conditions and slowed structural reform,” the bank wrote. The strategy intensified regional dependence on the construction sector, contributed to a buildup of household debt and prolonged weakness in consumer spending, and strained government finances.
The headquarters of the Bank of Korea in Jung District, Seoul. (Image courtesy of Yonhap)
The report noted that China’s ongoing downturn in real estate investment has prompted a more cautious response from Beijing, which policymakers believe reflects concerns about social risks and lessons drawn from Japan’s experience.
The Bank of Korea warned that economies with slowing population growth and lower potential output must be especially careful.
“When construction spending becomes the default tool for economic support, household or government debt typically rises and long-term recovery capacity weakens,” the bank said. Policymakers should instead focus on targeted infrastructure upgrades aligned with future needs such as artificial intelligence adoption and climate adaptation, it advised.
M. H. Lee (mhlee@koreabizwire.com)
