TOKYO – The champagne isn’t exactly flowing as South Korea’s Yoon Suk Yeol commemorates the two-year mark of his presidency.
So far, Yoon’s government has no answers for a sliding Korean won that’s increasing inflation amid stagnant wages and near-record household debt.
Instead, Yoon’s Korea has assumed a Japan-like crouch in letting the central bank take the lead on boosting growth and curbing risks.
“The fact that net exports are a core driver of growth with the largest contribution will stay unchanged as inflation keeps putting pressure and real purchasing power among households remains insufficient,” says KB Securities economist Gweon Heejin.
Yet it’s not Yoon’s first 730 days in power that worry many of South Korea’s 51 million people. It’s the next 1,095.
Beset by scandals, infighting and policy paralysis, Yoon risks being remembered as the fifth government in 20 years to pledge major economic change and achieve little.
With each, the sense of urgency has increased as China wins more and more market share in Asia. Yet bold actions in Seoul have been few and far between.
Yoon’s administration is proving to be just as inept about short-term challenges as longer-term ones. For example, he’s been reluctant to help consumers tighten their own budgets to cope with persistent price pressures. Instead, he’s prioritized public debt consolidation.
Nor has Yoon tended to low-hanging fruit reforms — like acting to increase gender equality in the workplace or to detail ways to cut bureaucracy, loosen labor markets and increase productivity.
But the real concern is how Yoon, like his predecessors, is shying away from curbing the power of the family-owned conglomerates, or chaebols, that tower over Asia’s fourth-biggest economy.
Until he does, much of what Yoon might do on economic retooling is treating the symptoms of Korea’s troubles, not the underlying causes.
On Thursday (May 9), Yoon held his first news conference in roughly two years in an attempt to reboot his conservative government. It comes a few weeks after Yoon’s People Power Party suffered a big defeat in parliamentary elections – a clear and stinging rebuke from voters.
“The opposition’s victory in the recent legislative elections will make it challenging” for Yoon “to advance much of its economic reform agenda in the remaining three years of its term,” Jeremy Zook, director of Asia-Pacific sovereigns at Fitch Ratings.
“Sustained policy gridlock could reduce upside potential to Korea’s medium-term growth outlook as it limits the ability of structural reforms to offset medium-term demographic pressures,” Zook said.
That’s a bigger concern than meets the eye. Even though Korean household debt declined a bit in recent quarters, it’s “among the highest of advanced economies globally as a share of GDP,” Zook notes.
At the same time, he adds, “elevated interest rates have pushed debt service costs higher, which has weakened the consumption outlook.”
It’s hardly what Seoul wants as “domestic demand is likely to remain subdued for much of this year, even though the first quarter GDP showed a positive surprise, as interest rates remain elevated,” Zook says.
“Household consumption has been pinched by higher debt service costs. Meanwhile, headwinds in the property sector are likely to constrain the investment outlook,” he adds.
Yoon’s stated push to improve that investment outlook also is off to an inauspicious start. In February, his Financial Services Commission unveiled a “Corporate Value-Up Program” to prod Korea Inc to boost efficiency, diversify boardrooms and increase shareholder returns.
Although Yoon didn’t name-check Japan, his sudden push to strengthen governance came the same week the Nikkei 225 Stock Average was topping 1989 highs.
Japan’s stock rally comes after 10 years of efforts by former prime minister Shinzo Abe’s party to prod CEOs to increase returns on equity and give shareholders a bigger voice.
Yoon’s desire to ride Tokyo’s coattails makes eminent sense as he takes a swing at ending the “Korea discount” that’s plagued Seoul for decades. Unfortunately, just as Japan’s reform efforts need reinforcements, Yoon’s scheme lacks specifics or a discernable timeline.
“Given the similarity of Korea’s challenges to those faced by Japan, it is small surprise” that the value-up plan “was part of Yoon’s election pitch to voters [that] borrows heavily from Japan’s long-running top-down corporate governance reform campaign,” says Udith Sikand, analyst at Gavekal Research.
Yet, Sikand adds, “the problem is that, like Japan’s initial set of reforms,” it “lacks teeth. Most of the proposed reforms intended to improve shareholder value are voluntary, and risk becoming box-ticking exercises. It took Japanese policymakers nearly a decade after the start of Abenomics to begin using more coercive methods to get staid Japanese corporate managers to change their ways.”
Of course, “hope springs eternal that Korean policymakers will not take as long as their Japanese peers to realize that dangling carrots works best when also brandishing a stick,” Sikand explains.
For example, from 2025 Japanese companies that do not announce plans to improve valuations will face the threat of delisting.
“Even if Korea were to push through effective corporate governance reforms in the near term, it does not follow that Korean equities would enter the sort of bull market that has seen Japan’s Topix climb 280% in local currency terms since late 2012,” Sikand says. “This is because Japan’s stock market rally has deeper roots than the corporate governance rerating theme.”
At the same time, the weakness of the yen helped Japanese corporations become more competitive versus global peers. Meanwhile, Japan’s exit from deflation signals an end to the private sector’s deleveraging pressure.
Plus, monetary policy is set to remain accommodative, despite the Bank of Japan’s exit from negative interest rates and yield curve control.
Can Yoon’s economy fare better? The payoff could be significant. “Valuations could be boosted by at least 25% if we assume Korean deep value sectors drift towards even half the valuations of their Taiwanese counterparts,” HSBC analysts wrote in a note to clients.
All this puts the onus on Yoon to stimulate domestic demand and raise Korea’s competitive game. Trouble is, the blistering defeat Yoon’s party suffered at the parliamentary election has him looking like a lame duck with three years left in his term.
In particular, it will make it exponentially harder for his party to enact initiatives to level economic playing fields to reduce the influence of the chaebols.
Over the last two decades, a succession of governments pledged to wrestle power away from Samsung, Daewoo, Hyundai, LG, Lotte, SK and other corporate behemoths.
Reducing their economic stranglehold is vital for young entrepreneurs starting new companies to have economic oxygen to create new, well-paid jobs.
Korea does indeed have a lively startup scene. Yet a lack of antitrust enforcement enables chaebols to buy, destroy or marginalize any new enterprise deemed a budding threat.
Will Yoon’s government be the latest to punt forward the hard work needed to reorient Korea for a world being remade by China?
What’s needed are bold and create steps to reduce red tape, incentivize innovation and productivity, phase out seniority-based promotions and pay scales, empower women and take family conglomerates down a peg or two.
Only by creating more economic energy from the ground up can top-down Korea find its niche in the new Chinese era.
If Yoon is going to increase competitiveness, he’ll need to display a level of gumption and independence he hasn’t shown thus far.
Not surprisingly, positive stock market momentum from the corporate reform campaign could “temporarily weaken for the next several months and only become viable again” in the second half of this year if Yoon’s team picks up the pace, says Citigroup strategist Jinwook Kim.
The first order of business is boosting domestic demand. Korea’s 1.3% growth rate in the January-March quarter year on year – the fastest rate in more than two years – was driven largely by exports.
As economist Kelvin Lam at Pantheon Macroeconomics puts it, “part of the reason is the economic recovery so far – powered by external demand – has remained remarkably strong even with restrictive levels of interest rates.”
Dave Chia, economist at Moody’s Analytics, adds that “export growth will likely remain the main driver of growth this quarter amid the strong demand for semiconductors. Export growth will likely remain the main driver of growth.”
This engine could sputter, though, as Chinese demand disappoints, US bond yields stay high for longer than expected, Japan grows 0.5% at the most and Europe walks in place. The same goes for global inflation overshooting forecasts in the months ahead.
The answer is disrupting an economy that’s been avoiding it for two-plus decades. If Yoon’s is the administration to do it, there’s not a second to waste.
Follow William Pesek on X at @WilliamPesek