Latest News

Latest News

Asia: Key Interest Rate In Japan Increases And Political Crisis in South Korea Deepens Its Economy

The Japanese economy has turned the page on deflation, which led the monetary authorities to conduct an unusual policy. Meanwhile, South Korea’s president's impeachment is impacting the country’s economy.

By EC Invest

For the third time, the Bank of Japan has raised its key interest rate from 0.25% to 0.50%. Japanese money rents are thus at their highest level in the last 17 years. Several factors explain the continued monetary normalisation in the Japanese archipelago. Inflation, at 3.6% in December, has exceeded the official target of 2% since April 2022. While wages will experience a strong second year of growth in 2025, price increases will remain positive in the coming years.

The Japanese economy has, therefore, clearly turned the page on deflation, which led the monetary authorities to conduct an unusual policy, with a negative policy rate and massive interventions in the bond market to keep 10-year interest rates around 0%. Therefore, there is an urgent need to normalise monetary policy, especially since the low interest rates in Japan caused the yen to fall on the foreign exchange market.

The other reason for the increase in the key rate is to support the value of the Japanese currency. The substantial undervaluation of the yen is now a handicap rather than an asset for the Japanese economy.

The currency’s weakness does not stimulate exports because labour shortages limit industrial production on Japanese soil. On the other hand, the yen depreciation increases import prices, penalising purchasing power and household consumption, which accounts for half of economic activity.

Political crisis weakens South Korea’s economy.

In South Korea, economic activity was again disappointing in the fourth quarter of last year, rising only 0.1% compared to the previous three months. Yet exports have been buoyant, partly in anticipation of Trump’s return to the White House and higher tariffs, and have boosted GDP growth. Government spending has also increased enormously. However, household consumption has been disappointing due to the political crisis that started in early December.

The removal of the President and uncertainty have led South Koreans to cut their spending. This shyness has been felt even beyond the South Korean borders. The average expenditure of South Korean tourists in Japan fell by 31% in December. The crisis in their investment plans has also held back South Korean companies.

This political uncertainty is expected to continue in the coming months and will continue to penalise economic activity this year. After a disappointing 2% in 2024, GDP growth is not even expected to reach this level in 2025, according to the latest South Korean Central Bank forecasts.

ECI JAPAN SK Economy GRAPHIC 920x320

Partner for Consumers, Associations and Companies to improve Financial Solutions and Markets.

Telephone:

+351 210 321 939

Address:

Avenida Eng. Arantes e Oliveira, n. 13, 1ºB 1900-221 Lisboa Portugal