It, therefore, seems that the last week's 25-basis-point rate cut by the South Korean monetary authorities will be followed by additional credit easing. The purpose of such measures is not just a question of adjusting the won's exchange rate. The economy needs help; it weakened markedly during the fourth quarter of last year, industrial production fell 0.4 percent in the three months to January and the unemployment rate continued to rise.
More won and a yen for babies
With nearly balanced government accounts and a relatively low public sector debt (36.7 percent of the gross domestic product – GDP), South Korea's policy mix definitely calls for an easier monetary stance. The real short-term rate of 1.25 percent, and the won's 5.5 percent appreciation against the dollar over the last twelve months, indicate the degree of policy tightness that is manifestly inappropriate for a weakening economic activity. That, of course, does not mean that Seoul should immediately jump on the quantitative easing (QE) bandwagon, but a few more rate cuts might be in order.
In fact, the Koreans may wish to take Japan's unbridled QEs as a cautionary tale. In spite of a monetary tsunami of the last two years, the Japanese economy sank 1.1 percent in the second half of last year. The interest-sensitive components of aggregate demand – household consumption and residential investments (64.4 percent of GDP) – accelerated their decline by 2.6 percent and 14 percent, respectively, in the last two quarters of 2014. Exports (16.2 percent of GDP) were the only major segment of the economy to register a strong 9.2 percent growth during that period as a result of the yen's trade-weighted depreciation of 6 percent over the last twelve months and Japan's weak domestic demand pushing the businesses to export in order to survive.
In spite of these disappointing results of an overly aggressive monetary easing, Tokyo seems ready to continue the same policy in the months ahead. Japan's trading partners may be forgiven for suspecting that this is just an attempt to strengthen the country's traditional export-led economic activity by means of a sharply depreciating currency.
The problem is that this old-style, free-riding quick fix is not the way out. The country's leaders are probably aware that they need to do more than that. They seem to have realized that their long-neglected structural problems are affecting the choice of society and Japan's place in the world. If, for example, they started to tackle these problems with strong and sustained efforts to stop and reverse the declining population growth, they would find out that the economic and social infrastructure of a serious family policy would do wonders for household spending and residential investments – nearly two-thirds of their economy.
China, Japan and South Korea are the true engines of East Asia's economic growth. In spite of strong political and economic differences, seemingly irreconcilable territorial claims and contested views of their recent history, these countries continue to maintain open and active channels of trade and investments among themselves. Unlike in some other investment destinations, they are not settling their disputes with raging wars, bellicose exclusions, loathsome discourse and bruising impediments to trade.
Investors might wish to keep that in mind when considering their global portfolio preferences. They may also wish to note – as Volkswagen does – that East Asia's economic fundamentals and growth potential offer better profit opportunities than those in many regions competing for world capital flows.
Michael Ivanovitch writes about world economy, geopolitics and investment strategy: @msiglobal9