Impact of Abenomics on Korea’s Economy


abenomics_jimAfter the global financial crisis that swept the globe since 2008, Korea has well managed to overcome the crisis despite subsequent European fiscal crisis. Due to its top global competitiveness in its higher value-added industry such as automobile, electronics and heavy industries etc., Korea endured an unprecedented crisis thanks to export performance. However, high dependency on export doesn’t seem to give a roseate future to Korean economy. Due to massive increase of liquidity from FRB’s continued quantitative easing policy and higher adjustment of Korea’s national credit rating, foreign capital inflow into Korea increased. As a result, Korean won was pressured to appreciate and low exchange rate became problematic, which is indeed unfavorable for Korean export companies. To make matters worse, Japan seems determined to finally do “Whatever it takes” in order to revive their sluggish economy which was even called as “the lost two decades”. Newly-elected prime minister, Abe is putting his priority solely on economic policy other than political and diplomatic issues.

Abe’s new economic policy is also known as Abenomics, named after Abe and economics. Abenomics consists of monetary policy, fiscal policy, and economic growth strategies to encourage private investment and thereby revive the whole economy. The detailed policies includes inflation targeting at a 2% annual rate, correction of the excessive yen appreciation, setting negative interest rates, radical quantitative easing, expansion of public investment, buying operations of construction bonds by Bank of Japan (BOJ), and revision of the Bank of Japan Act. Fiscal spending will increase by 2% of GDP, likely raising the deficit to 11.5% of GDP for 2013. Abenomics looks similar to FRB’s QE policy in that BOJ purchases bonds and provide liquidity to market.

Given that Korea’s primary industries such as automobile, electronics, chemical and heavy industry are in competition with Japan, Abenomics can cause serious damage to export performance. If Japan continues its aggressive easing monetary policy, Japanese Yen will be devaluated, which means that Japanese companies will get comparative advantage due to higher exchange rate. This situation is definitely unfavorable for Korean companies and the whole Korean economy in a larger scale. In fact, Japanese Yen /US Dollar exchange rate marked 99.54 on April 11th, compared to 77.46 on September 13th before Abenomics. As Japan’s expansive economic policy takes its full-fledged form since January, JPY/USD exchange rate is soaring high. As JPY/USD rate rises, despite steady rise of KRW/USD rate, Korean export companies are losing their price competitiveness. As a result, export performance on February aggravated, sharply compared to previous months. Particularly, automobile industry which has strong Japanese competitors showed greater decline in its export performance. The table and graph below shows export change in percentage in four product group as of February, 2013.


graphIt seems that Abenomics has negative effect on Korean export performance. Why does Japan aggressively propel Abenomics? And how long will Abenomics last? Japan’s last two decades can be described as ‘the lost two decades’. Japan’s economic growth remained sluggish and had no breakthrough to overcome the stagnation. Given that interest rate was already low, so far as negative level, the Bank of Japan had no advantage to lower the key interest rate and expect expansive monetary policy effect. After the Plaza Agreement, which artificially lowered JPY/USD exchange rate, Japanese firms lost their price competitiveness and were overtaken by new competitors from Newly Industrialized Companies (NICs). Prolonged deflation also gave burden to Japanese economy, lowering the asset prices and aggravating investment sentiment. Until Japanese economy fully get recovered, expansive economic policy of BOJ and Japanese government will not stop. In order to well manage the current situation, Korea should look carefully on the negative effect that Abenomics might cause and come up with proper resolution.

By Soon Young (Andy) Chung (


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