Korea’s Lesson for Japan Seoul’s domestic reforms are leading to growth without devaluation.

Korea’s Lesson for Japan

Seoul’s domestic reforms are leading to growth without devaluation.

Feb. 13, 2014 11:59 a.m. ET

Amid the recent emerging-market turmoil, a stable exception has been South Korea. The Bank of Korea’s decision on Thursday to hold interest rates steady raised nary an eyebrow among investors, and there’s a lesson here for Japanese Prime Minister Shinzo Abe.

The Bank of Korea’s monetary policy committee noted that the domestic economy is gaining strength. The 3.9% year-on-year growth rate for the last three months of 2013 was the highest in three years. A slight spike in the unemployment rate in January to 3.2% resulted mainly from more Koreans entering the labor force, but they appear to be finding jobs.

Korea has maintained its economic resilience even as the Korean won has appreciated by 9% against the dollar since early 2012. This belies a central plank of Mr. Abe’s agenda for Japan—that currency devaluation is critical for export competitiveness. Korean companies have held their own against their Japanese competitors over the past year despite Mr. Abe’s dramatic weakening of the yen.

Among other reasons, Korean companies have competed globally by improving quality. Note that Apple‘s AAPL +1.59% leading challenger is Samsung016360.SE +0.78% not a Japanese company. When it comes to the sophisticated products manufactured by developed economies, market share is more about innovation than price.

Mr. Abe could also mark the ways Korea benefits from a free-trade push Seoul started several years ago. Trade agreements with the European Union and the U.S. are now in effect, opening formerly sheltered domestic industries to competition and investment. There are no hard data yet, but these deals are widely expected to stimulate investment in industries where productivity currently lags developed economies by as much as one-third.

Seoul has been quicker and more eager than Tokyo to embrace free trade; more willing to tolerate a stronger currency; and more committed to domestic reforms, especially in paring back old industrial policies and cutting red tape on services. Mr. Abe has signed Japan up for the multilateral Pacific trade talks. But otherwise his revival plan consists mainly of a weak yen, old-time fiscal stimulus and nudges to corporate investment rather than freeing the private economy.

Korea still has much work to do in reforming its economy, as officials in Seoul acknowledge, but they can draw encouragement and build political support from their recent successes. Korea industrialized largely by following the export-led model of postwar Japan. Perhaps it’s time for the erstwhile teacher to learn a lesson from its former student.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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