South Korea should avoid following Japan’s lead of using fiscal and monetary stimulus to combat the challenges of an aging economy, central bank Governor Rhee Chang-yong said, urging reforms instead to boost fertility.
Aging is a rising concern in the developed world, and Korea is among the hardest-hit, together with Japan. South Korea shattered its own record for the world’s lowest fertility rate in 2021, adding to long-term pressure on policymakers to keep interest rates low and fiscal stimulus ample to boost growth.
“It’s easier to say, ‘Let’s use the fiscal policy to stimulate the economy if growth is going down. Let’s use the loose monetary policy to increase the inflation rate’,” Rhee said in an interview. “It all failed.”
Korea should instead embark on long-delayed structural reforms, even though they may be painful, while increasing female labour participation, improving the education system and utilizing foreign workers more effectively, he said.
“Many economists tried to solve these aging problems of Japan using macro policy,” he said. “Macro policy is not designed to address this structural issue. So for Korea, I’d rather advise to my government that macro policy, fiscal and monetary, can be a sideshow.”
Rhee said Korea is already seeing a “real impact” from aging, and highlighted China and Thailand among other countries experiencing serious aging in Asia.
The central bank chief has been vocal on issues overshadowing the Korean economy since taking office in April. He said last week the Bank of Korea would need “strong confidence” that inflation is converging to its medium target of 2 per cent before considering any policy easing.