Seoul: The South Korean economy is showing increasing similarities to Japan's past stagnation, and bold structural reforms, along with innovation, are needed to prevent prolonged low growth, the central bank said Thursday. In its latest research report, the Bank of Korea (BOK) highlighted concerns, noting that South Korea "is following in Japan's footsteps in many areas," and identified mounting private-sector debt as a major issue.
According to Yonhap News Agency, Korea's private-sector debt reached 207.4 percent of the gross domestic product (GDP) in 2023, approaching Japan's peak level of 214.2 percent during its asset bubble period in 1994. After Japan's bubble burst, asset-linked debt caused instability in the banking sector, leading to distorted capital allocation and funds flowing into low-productivity sectors such as real estate and "zombie" firms.
The report emphasized the need for tight control over debt levels through precise macroprudential regulation, stronger coordination with monetary policy, sustained efforts to manage household debt, and swift, decisive corporate restructuring. South Korea and Japan also face similar demographic challenges, including low birth rates and rapid population aging, the BOK noted.
Japan experienced declining birth rates and accelerated aging around the time of its asset bubble collapse, leading to reduced labor input, a fall in potential growth, and downward pressure on prices due to prolonged low growth. In South Korea, the total population began declining in 2020, with the demographic shift occurring earlier and more rapidly than in Japan, according to the BOK.
To tackle these challenges, the BOK stressed the importance of expanding the labor force both quantitatively and qualitatively by increasing participation from those currently outside the labor market and enhancing innovation-driven education and training. Developing a more systematic and sustainable approach to utilizing foreign labor while continuing efforts to gradually raise the birth rate is also essential, the BOK added.
South Korea's total fertility rate stood at 0.75 in 2024, significantly below the replacement level of 2.1 needed to sustain the population without immigration. As of December 2024, South Korea had officially entered a "super-aged" society, with over 20 percent of its population aged 65 and older.
The BOK warned that the current ultra-low birth rate could lead to negative economic growth after 2050. To revitalize the economy, the BOK emphasized learning from Japan's past and implementing structural innovation and creative destruction to overhaul South Korea's aging economic framework, which is outdated relative to its level of development.