What Has Happened Since Korea’s 1997 Financial Crisis and Japan’s Decade-Long Recession?

Korea experienced a major financial crisis in 1997, which shook up the entire economy. Japan has gone through a decade-long recession.

Japan’s economy and Korea’s economy have several aspects in common: state-led, export-dependent economy, big business-centered industrial structure, and so on.

While the U.S. facing serious property/credit bubbles couldn’t have picked a worse time for economic contraction, Korea and Japan was blessed with a global economic boom, so they could export.

Japan and Korea has been dependent on exports to the U.S. since it has been the world's largest consumer. Now that the U.S. economy is in bad shape and its over-indebted consumers are losing the purchasing power, their export-dependent economies are at risk.

As in Japan, Korea’s public sector debt burden is increasing. While Japan is well known for its domestic savings, Korea’s household debt is quite worrisome.

Japan did almost everything the U.S. is employing such as quantitative easing, propping up asset prices through artificial means, and fiscal stimulus during their lost decades. And yet, where are they now? They are facing swollen public debt, shrinking domestic market and a declining population.

Corporate borrowing was the major culprit of Japan’s crisis. It skyrocketed in the 1980s using property and stock portfolios as collateral. As Richard Goo, a chief economist at Nomura Research Institute puts it, “in order to repair their balance sheets, private sector moves away from profit maximization to debt minimization.”

As in Japan, corporate borrowing in Korea was one of the main causes of the 1997 financial crisis. Some major Korean corporations including Samsung are reportedly sitting with cash on their balance sheets. They seem to take their lesson.

It is appalling that the core problems facing the U.S., Japan, and Korea are quite similar: debts, asset bubbles, and misallocation of resources.

Of course, macro economic reality affects businesses and consumers. Big business is building up cash on balance sheets while small business is starving for capital. Consumers with contracting income are becoming more cautious with their spending, so domestic demand is shrinking.

As I pointed out on numerous occasions, the 1997 financial crisis could have been a blessing in disguise for Korea. This is true for Japan.