{"id":2206005,"date":"2024-08-01T15:42:06","date_gmt":"2024-08-01T06:42:06","guid":{"rendered":"https:\/\/koreapro.org\/?p=2206005"},"modified":"2024-08-02T17:26:00","modified_gmt":"2024-08-02T08:26:00","slug":"south-korea-braces-for-economic-turbulence-following-japans-interest-rate-hike","status":"publish","type":"post","link":"https:\/\/koreapro.org\/2024\/08\/south-korea-braces-for-economic-turbulence-following-japans-interest-rate-hike\/","title":{"rendered":"South Korea braces for economic turbulence following Japan\u2019s interest rate hike"},"content":{"rendered":"
The Bank of Japan (BOJ) unexpectedly <\/span>raised its overnight call rate<\/span><\/a> target on Wednesday to 0.25% from the previous 0 to 0.1% range, marking the highest level since 2008. While it is still low by global standards, this relative spike reflects the BOJ\u2019s broader strategy to move toward a more normalized monetary policy.<\/span><\/p>\n This shift poses three primary risks for South Korea: heightened exchange rate volatility, potential capital outflows and threats to economic stability.<\/span><\/p>\n The South Korean won has already been under pressure, <\/span>depreciating against the U.S. dollar<\/span><\/a> amid global economic uncertainties. This new development could exacerbate the won\u2019s depreciation, increasing import costs and inflationary pressures.<\/span><\/p>\n Additionally, the allure of higher returns in Japan might prompt investors to withdraw their money from South Korea, resulting in capital outflows that may destabilize financial markets and further weaken the currency.\u00a0<\/span><\/p>\n The Bank of Korea (BOK), which has <\/span>maintained its interest rate<\/span><\/a> at 3.5% to combat inflation, faces the task of navigating these new external pressures while balancing domestic economic challenges such as rising household debt and political demands for lower interest rates.<\/span><\/p>\n As such, the BOK will likely adopt a cautious approach, maintaining its current rate while signaling readiness to adjust if necessary to counteract excessive currency depreciation or capital outflows, support the won, ensure financial stability and manage inflation without placing undue burdens on households and businesses.<\/span><\/p>\n CURRENT ECONOMIC INDICATORS<\/b><\/p>\n As of June, South Korea\u2019s inflation rate had <\/span>slowed to 2.4%<\/span><\/a>, approaching the BOK\u2019s target of 2%. This deceleration in inflation reflects a stabilization of consumer prices, following heightened inflationary pressures driven by supply chain disruptions and increased import costs. Additionally, South Korea\u2019s GDP growth is <\/span>projected at 2.6%<\/span><\/a> in 2024.<\/span><\/p>\n Despite this positive growth outlook, the country faces significant economic challenges. Household debt, primarily mortgage loans, rose by $20.6 billion (<\/span>26.5 trillion won<\/span><\/a>) in the first half of 2024, the highest increase in three years.\u00a0<\/span><\/p>\n Moreover, the South Korean won has depreciated against the U.S. dollar, with an exchange rate of about <\/span>1,370 won per dollar<\/span><\/a>, driven by a strong dollar and weak yen.<\/span><\/p>\n The BOK\u2019s policies have led to considerable political pressure to reduce interest rates. For instance, Prime Minister Han Duck-soo <\/span>expressed optimism<\/span><\/a> about a potential interest rate cut earlier in July, suggesting a preference for accommodative monetary policy to support economic recovery and address social concerns.<\/span><\/p>\n However, businesses and consumers are strained, with the business sentiment index for the third quarter of 2024 marking a <\/span>10-point decline<\/span><\/a>, according to the Korea Chamber of Commerce and Industry.<\/span><\/p>\n Consumer confidence is similarly affected by economic uncertainties. Rising household debt and high borrowing costs have led to cautious spending behavior, further slowing economic momentum.<\/span><\/p>\n