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Deutsche Bank has forecast that Korea is not likely to repeat Japan’s Lost Decades.
According to the Korea Center for International Finance last week, Deutsche Bank noted that Korean economic growth will slow, but that the possibility of a long-term depression is low.
The bank forecast Korea’s economic growth rate to reach 3.5 percent on average between 2011 and 2020 and then drop to 2.5 percent from 2021 to 2030. This is due to low female labor market participation and an aged population.
However, Deutsche Bank also noted that the Korean economy substantially differs from the Japanese economy in the 1980s, before Japan fell into a long-term depression.
For example, Japan’s exports were hit hard by an artificially appreciated yen based on the Plaza Accord, but factors related to exchange rates, including a low yen, have a limited impact on Korea’s exports.
In addition, Japan’s housing market experienced a hard landing as the Bank of Japan raised the standard interest rate in the late 1980s. However Korea is not likely to follow Japan’s footsteps, as the Bank of Korea is expected to stabilize the standard interest rate gradually.
Deutsche Bank pointed out that when the yen was strong, Japanese companies increased their overseas production and Korea’s overall manufacturing slowed, adding that the Korean government needs to restructure its regulations and tax system to promote more investment from domestic companies.
Source: Yonhap News (Aug. 14, 2013)