## Korea’s Challenges Ahead—Lessons from Japan’s Experience

_IMF Working Papers, January 18, 2017_

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## Bibliographic details
- Authors: Edda Zoli
- Published: January 18, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475568882.001

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### Summary
- The paper draws parallels between Korea and Japan across demographics, potential growth, balance sheets, asset prices, and inflation.
- Korea’s demographic trends seem to track Japan’s with a lag of about 20 years.
- New econometric analysis presented in the paper suggests that aging will exert a downward drag on Korea’s inflation going forward.
- Korea does not appear to be headed toward deflation, according to the paper’s assessment.

### Key findings
- Demographics and growth:
  - Korea’s demographic trends seem to track Japan’s with a lag of about 20 years.
  - Aging is projected to exert a downward drag on inflation (new econometric analysis).
- Productivity and labor markets:
  - Low productivity in the service sector is a shared challenge for Korea and Japan.
  - Labor market duality is common to both countries and weakens overall labor market performance.
- Corporate balance sheets and restructuring:
  - Korea’s corporate balance sheets are stronger than Japan’s in the early 1990s.
  - Despite stronger balance sheets, Korea needs to progress with the restructuring of nonviable firms to avoid adverse consequences of delayed balance-sheet repair similar to Japan’s experience.
- Asset prices and macroprudential policy:
  - Korea can prevent bubbles in asset prices (which were at the origin of Japan’s initial crisis) through continued use of macroprudential policies.
- Fiscal capacity:
  - Given its strong fiscal balance-sheet position, Korea can afford using fiscal policy actively to incentivize corporate restructuring and structural reforms and to cushion their possible short-term adverse impact.

### Policy recommendations
- Structural reforms:
  - Address low productivity in the service sector through targeted structural reforms.
  - Reduce labor market duality to improve labor market performance and productivity.
- Corporate restructuring:
  - Accelerate restructuring of nonviable firms to avoid delayed balance-sheet repair and its adverse consequences.
  - Use fiscal incentives to facilitate corporate restructuring where appropriate.
- Macroprudential and fiscal policy:
  - Continue and strengthen macroprudential policies to prevent asset-price bubbles.
  - Deploy fiscal policy actively—taking advantage of a strong fiscal balance-sheet position—to incentivize reforms and cushion short-term costs.

### Analytical note
- The paper’s new econometric analysis indicates aging will exert a downward drag on Korea’s inflation going forward, even though the country does not appear to be headed toward deflation.

*Edda Zoli, "Korea’s Challenges Ahead—Lessons from Japan’s Experience", IMF Working Paper No. 2017/002, January 18, 2017.*

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_Source: https://www.imf.org/en/publications/wp/issues/2017/01/18/koreas-challenges-ahead-lessons-from-japans-experience-44549_