The famous Shibuya Scramble Crossing near Shibuya Station in Tokyo, Japan (Image courtesy of Yonhap)
SEOUL, June 7 (Korea Bizwire) — South Korea must embrace bold structural reforms and innovation to avoid falling into a prolonged period of low growth similar to Japan’s post-bubble stagnation, the Bank of Korea (BOK) warned in a policy report released shortly after President Lee Jae-myung’s inauguration.
In its report titled “Lessons from the Japanese Economy,” the central bank highlighted striking parallels between the two countries, citing surging private-sector debt, demographic decline, and delayed digital transformation as key warning signs.
As of 2023, South Korea’s private-sector debt stood at 207.4% of GDP — nearing Japan’s peak of 214.2% during its asset bubble in the early 1990s. The BOK cautioned that without rigorous macroprudential oversight, Korea could face similar distortions in capital allocation, such as funding unproductive sectors or “zombie firms,” and risk a broader financial crisis.
Japan’s economic malaise was exacerbated by demographic shifts, with falling birth rates and a rapidly aging population contributing to weaker labor supply and deflationary pressures. The BOK noted that Korea’s demographic decline is happening even faster: the working-age population peaked in 2017, and the overall population began to decline in 2020.
Japan’s economy endured a prolonged stagnation over the past 30 years, giving rise to the now-familiar phrase “the lost three decades.” Increasingly, experts are warning that South Korea may be on a similar path unless bold and decisive action is taken. (Image courtesy of Getty Images Bank/CCL)
To counteract this trend, the report calls for an expansion of labor participation, investment in innovation-driven education, and a more structured approach to integrating foreign workers. “Efforts must also be made to gradually raise the fertility rate,” the BOK said.
The report also urged a reassessment of Korea’s historical growth model, warning that past successes may now act as barriers to reform. “Japan’s persistence with vertical integration and its export-heavy strategy long after its economic peak led to the erosion of industrial competitiveness,” the report said.
To avoid the same fate, Korea should channel efforts into nurturing advanced industries and high-value service exports as new growth engines.
On fiscal and monetary policy, the BOK pointed to Japan’s ballooning debt — 240% of GDP in 2023 — as a cautionary tale. Though Korea’s public debt ratio remains comparatively low at 50.7%, the bank stressed the importance of fiscal sustainability. “Governments must return to surplus spending after using deficits to counter downturns,” it stated.
The Bank of Korea headquarters in Seoul (Image courtesy of Yonhap)
While monetary policy plays a role in managing short-term economic fluctuations, structural transformation must come from reform, the bank emphasized. “Monetary policy can complement, but not substitute, efforts to raise the potential growth rate.”
Quoting Swedish economist Johan Norberg’s Peak Human, the BOK concluded: “A nation’s rise or fall is not a matter of fate, but of choice. Only through innovation and creative destruction can Korea rejuvenate its aging economic structure and regain long-term vitality.”
M. H. Lee (mhlee@koreabizwire.com)
