Ichiro Suzuki
Its official. South Korea, or the Republic of Korea (ROK), has overtaken Japan in per capita GDP in 2024, at $36,132 vs $32,859, according to the IMF. This has been expected for years, especially since the ROK first did it in purchasing power parity (PPP), and it has finally arrived in nominal terms, too. Size of Japan’s GDP has been stagnant for three decades following the historic bubble’s bust. It has only recently crossed the ¥600 trillion mark after years of hovering around ¥550 trillion while the rest of the world kept expanding. One factor that has driven the economy to reach 600 is post-pandemic inflation. This isn’t commendable but the economy’s size is always measured in nominal terms. It was a long, long adjustment period of excesses of the 1980s amid mild deflation. Japan’s per capita income was still ranked within Top 5 at the turn of the century after ten years of stagnation, due to unwanted overvaluation of the yen. Then, in 2013 when correction of the over-valued currency began, Japan began to fall on the global rankings rather precipitously.
The ROK on the other hand displayed strong performances over the last quarter century. In late 1997, the Korean economy was crushed when waves of selling of Asian currencies reached its climax. Highly leveraged Korean chaebols (conglomerates) were driven to the corner. Amid fierce capital flight, 11 out of 30 largest chaebols collapsed, taking the economy into near depression. The market force was so intense that it essentially wiped out the system that brought an economic miracle in the previous quarter century.
The intense shock waves inflicted by the Asian financial crisis (AFC) forced the ROK to destroy the ‘ancient regime’ that might have outlived its usefulness. The country needed to be reshaped and the market force had delivered a change in a radical fashion. On the other hand, guarded by the depth of accumulated wealth, Japan withstood the whirlwind that hit East Asia in 1997. Current account deficits triggered waves of selling in the region but Japan was safe with its surpluses. Its wealth gave Japan the luxury of adjusting itself to a rapidly changing world at the speed that the country has been comfortable with, Professor Ulrike Schaede at UC San Diego says. In fact, Japan is not doing too badly lately, at last having adjusted itself to the 21st century, but the country still spent far too much time on it. While Japan progressed painfully slowly, the rest of the world moved ahead faster and one of them was the ROK that reshaped itself radically. Such different experiences have brought different trajectories of economic growth.
The AFC has erupted at the dawn of the Internet. Total shake-up of the economy not only made its export machine more focused and efficient with much healthier balance sheets, but also drove the South Korean economy to adopt the burgeoning technology aggressively. Today, the ROK is boasting of one of the most digitized economies in the world, whereas few countries are running behind Japan in digitization. Resistance to digitization has been strong in Japan. Older generations have not been keeping up with a rapid change, and the Japanese government listens to them, perhaps too attentively. Government offices were loaded with papers until recently, obviously to the detriment of economic performances. In addition, too many regulations still persist in the Japanese economy, holding back its growth potential. While Prime Minister Shinzo Abe tried to enforce sweeping deregulation in the last decade, he failed to garner popular support and it didn’t go through.
Entertainment is one industry that took off on successful digital marketing. K-pop and K-drama made strong inroads into overseas markets, first to Japan, then to the rest of Asia and finally to the U.S. Because of the small domestic market, the Korean entertainment industry always eyed on the markets abroad. With the advent of social media and YouTube, they succeeded in sending their singers and actors/ actresses to stardom outside the country, monilizing their fan base to push them. In addition, Netflix got the American audience used to watching foreign language films with subtitles. K-dramas captured this new wave very efficiently. Japan’s entertainment industries have not been without an ambition of overseas expansion. Behind the second largest market, however, they never became serious enough about exporting their contents. Music itself may not have been too bad, but there has never been well thought-out marketing strategy like the one Korean competitors have laid out. With deeper tradition in Japan, too many cumbersome practices stands in the way of digital marketing, too. While Japan’s animated films and manga have gained popularity overseas in the recent decades, this has been much product-driven, and took off with not so great marketing efforts. (Japan leads the world in CD sales. A CD package contains a ticket that allows a fan to shake hands with an idol singer at a fan event. Young men and women rush to buy CDs physically for this special opportunity. This is an epitome of old fashioned marketing of music not seen elsewhere in this age of streaming services.)
On top of it, the ROK’s export industries have never been afflicted with excessively overvalued currency, which drove Japanese manufactures out of the country to where their products are consumed. This has made a difference in GDP between the two. Not being free-float in the market, the Korean won has been almost always priced somewhat less expensive than the Japanese yen. Then, the AFC has massively devalued the won along with other Asian currencies. A competitive won gave an added boost to the economy once the export industries were regrouped after the crisis. Relatively to the ROK, Japan may not be doing too badly in terms of gross national income (GNI) that take into account Japanese companies’ activities on foreign soil. That said, lack of digitization and excessive regulations keep weighing on the Japanese economy. The ROK had its own problems but overall its economy is still doing well, compared not only to Japan but also to Europe that are mired in serious structural problems.
Mr. Suzuki is a retired banker based in Tokyo, Japan.
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