Global Inflation... Why South Korea and Japan Take Opposite Paths

South Korea Raises Interest Rates, Japan Plans Cuts
Different Paths Amid Global Inflation Fears
Japan's Massive National Debt Limits Rate Hikes
Prolonged Recession Raises Stagflation Concerns

Bank of Japan (BOJ)

[Image source=Yonhap News]

As global inflation rises, central banks around the world, including the Bank of Korea and the U.S. Federal Reserve (Fed), continue to raise their benchmark interest rates. Meanwhile, Japan is drawing attention for taking the opposite approach by mentioning "additional monetary easing." Despite facing similar international conditions such as rising global raw material prices due to the Ukraine crisis and depreciation of their own currencies caused by U.S. quantitative tightening, why are South Korea and Japan responding differently?

According to major foreign media and the Bank of Japan on the 3rd, Japan has decided to maintain its negative interest rate (-0.10%) despite global inflation fears. Masazumi Wakatabe, Deputy Governor of the Bank of Japan, stated at a financial and economic meeting on the 1st that recent price increases are better addressed through measures other than monetary policy, and he did not rule out the possibility of additional easing if the economy worsens.

This response is completely different from that of the Bank of Korea. As international oil and food prices soar, causing consumer prices to rise sharply, the Bank of Korea is focusing on stabilizing the market by raising benchmark interest rates. The Bank of Korea has already raised its benchmark rate five times over the past 10 months, bringing it up to 1.75%. Lee Chang-yong, Governor of the Bank of Korea, hinted at further rate hikes, saying after the Monetary Policy Committee meeting, "We will operate monetary policy focusing on inflation going forward."

Although Japan maintains an accommodative monetary policy, its inflation situation is not favorable. Japan's consumer price index for April rose 2.1%, lower than South Korea's but marking the highest increase in over seven years. Japan's corporate goods price index rose 10% year-on-year, recording the largest increase ever.

With low interest rates maintained despite a strong dollar, the yen continues to depreciate. This year, the dollar-to-yen exchange rate has hovered above 130 yen, the highest in 20 years. Since the administration of Prime Minister Shinzo Abe, the Japanese government has tried to overcome decades of economic stagnation through "Abenomics," based on a weak yen. However, recently, the weak yen has increased import burdens, fueling inflationary pressures, while the export benefits are not as significant as before, leading to criticism of the "bad yen depreciation."

Nevertheless, the background for Japan maintaining an accommodative monetary policy lies in its soaring fiscal deficit. As of the end of last year, the Japanese government's outstanding government bonds amounted to about 1,000 trillion yen. In this situation, raising interest rates would astronomically increase the government's interest burden. It is also difficult to overturn the monetary easing policy maintained for over a decade. In Japan, there are concerns that raising the benchmark interest rate could lead to stagflation. Ahn Kwon-min, a researcher at NH Investment & Securities, explained, "The main causes of yen weakness are monetary policy outlook differences due to inflation gaps and worsening trade deficits. However, even in the April Monetary Policy Meeting minutes, the Bank of Japan reaffirmed the need to continue monetary easing."

This content was produced with the assistance of AI translation services.