1. Over the past half-century, Korea's economy has achieved remarkable success, widely regarded as a model admired by the world. Today, however, it stands at a critical juncture marked by a rare confluence of internal and external upheavals that may occur only once in a generation.
2. Internally, Korea’s once vibrant growth engine is rapidly losing momentum as long-standing structural imbalances have begun to surface.
3. How, then, can Korea's economy navigate these mounting internal and external challenges? This paper argues that a meaningful starting point lies in drawing lessons from Japan’s experience, an economy that once followed a similar trajectory of rapid growth and structural transformation.
4. During the period of Japan’s asset bubble boom and bust, Japan faced a confluence of structural shifts across three dimensions that contributed to prolonged low growth and low inflation: (i) a rapid buildup of debt stemming from asset market excesses, (ii) accelerated population aging, and (iii) the rise of global horizontal production systems. While structural reform was widely seen as the only sustainable path forward, Japan continued to rely primarily on counter-cyclical measures, which gradually eroded fiscal space and limited the effectiveness of monetary policy over time.
5. Korea now finds itself in a situation not fundamentally different from Japan’s past. Household debt, driven largely by real estate related borrowing, has accumulated to a level of concern. As of 2023, the private sector leverage ratio stood at 207.4% of GDP(IMF Data), approaching Japan’s peak of 214.2% in 1994 during its asset bubble period. Meanwhile, the pace of population aging in Korea is even faster than that experienced by Japan. Since the early 2000s, Korea has actively participated in global production networks, achieving growth through export expansion, particularly to China and in the information technology sector. However, the foundations of this growth strategy are now under strain, as the global trade order becomes increasingly fragmented and as China’s exceptional contribution to demand diminishes. Without proactive responses to these structural changes, Korea risks a deterioration of its fiscal soundness due to demographic aging and growing constraints on monetary policy stemming from the household debt overhang.
6. What should Korea learn from Japan’s experience, and in what direction should its policy response evolve? This paper identifies five key lessons that offer guidance in shaping Korea’s future policy agenda.
① Managing debt accumulation in the real estate sector requires proactive and phased risk mitigation. In addition, once debt distress actually materializes, swift and decisive restructuring is essential.
- Given these conditions, Korea should adopt a more stringent approach to managing its debt ratio by: (i) implementing targeted and calibrated macroprudential regulations, (ii) strengthening coordination with monetary authorities, (iii) maintaining a disciplined stance on household debt, and (iv) executing swift and decisive debt restructuring when needed.
② Low fertility and a rapidly aging population were among the primary drivers of Japan’s prolonged stagnation.
- To respond effectively, Korea should draw on policy precedents to expand both the quantity and quality of its labor force. This includes encouraging the participation of underutilized groups, such as women whose careers have been interrupted, skilled retirees, and rested young people with work experience, while scaling up investment into innovation oriented education and workforce development. In parallel, Korea should adopt a more systematic and sustainable framework for engaging foreign labor and continue its long-term efforts to raise the fertility rate.
③ Both Korea and Japan achieved remarkable growth through export oriented, manufacturing led development strategies. However, the legacy of past success can become a hindrance to reform when domestic and global conditions change.
- To remain competitive, Korea must focus on fostering high-tech industries. At the same time, Korea should promote high value-added services as a new engine of economic growth.
④ The sharp increase in age-related rigid public spending, particularly on pensions and healthcare, has become a major source of fiscal pressure. Without early and proactive measures to contain this trend, the government’s capacity for counter-cyclical fiscal support could diminish, and sovereign creditworthiness may come under strain. Korea must not neglect efforts to ensure the long-term sustainability of its public finances.
⑤ Monetary policy, whether conventional or unconventional, is primarily a counter-cyclical instrument, not a tool for structural transformation. Enhancing potential growth requires structural reform, while monetary policy should serve in a supporting role by stabilizing the economic cycle.
7. Counter-factual simulations suggest that if Japan had effectively addressed its demographic transition and avoided a population decline from 2010 onward, its average annual GDP growth during 2010–2024 could have been 0.6%p higher. In Korea’s case, potential growth is projected to decline to as low as 0.6% by the late 2040s(BOK IssueNoteNo.2024-33,Dec.2024). However, if structural reforms are successfully implemented, much of this decline could be offset by improvements in total factor productivity, by a gradual increase in fertility, and by higher labor quality.
8. Korea's economy stands at the crossroads. As Johan Norberg argued in "Peak Human," the rise and fall of nations is not the result of fate, but of choices. Although Korea may appear to be retracing aspects of Japan’s path, its future need not be viewed with pessimism. By internalizing the lessons from Japan’s experience and undertaking bold structural reforms to overhaul its aging economic structure, Korea could renew its growth momentum through a process of creative destruction.