“Korea’s future is Japan.”
This expression ranks among the Korean economic lexicon’s most frequent terms, used in newspapers, columns, and even everyday speech. The analogy holds little coincidental merit: since colonization by Japan in 1910, the republic had reflected Japan politically, economically, and industrially. Now the similarity that perturbs economists the most is the risk of bubbles in asset prices. This essay contends that Japan’s experience provides a lesson for Korea: maintain disciplinary monetary policy, manage financial risk promptly, and stabilize the larger system as a shield for the economy and citizens.
The bubble involves the price of such items as real estate, stocks, or commodities rising well ahead of their intrinsic value due to the factor of speculation, optimism among investors, and abundant credit at affordable rates instead of strong fundamentals. Japan’s bubble is the case study. It stoked one of the biggest booms of the modern era before imploding into one of the steepest downturns. Japan’s GDP stood at approximately 5 trillion dollars in 1994; by the year 2023, the level had slipped to 4.2 trillion. If it had merely followed the global average annual growth of 3.5 percent, it would have reached nearly 13 trillion. The deficit shows the extent of the harm bubbles in the form of assets may cause when permitted to go unchecked.
Unfortunately, Korea also seems to be following the same track. The average Seoul apartment cost approximately 366,000 dollars in 2015. By 2025, this had jumped nearly sevenfold to nearly 972,000. Had prices increased merely with the growth of inflation, they would be approximately 441,000. The gap spells trouble between what the underlying fundamentals dictate and speculative frenzy. Skeptics fear if this indeed is a bubble, when it eventually pops, the outcome may come close to what happened in Japan—or potentially worse.
In order to grasp how this could be prevented for Korea, Japan’s fall first of all needs to be examined. There is debate, but nearly all the analysts locate three key reasons for the crisis of the 1980s.
First, monetary policy allowed excess liquidity to overheat the system.
After the Plaza Accord in 1985, the yen appreciated sharply, threatening exports. To offset the shock, the Bank of Japan cut interest rates and expanded credit. Cheap borrowing fueled speculation in property and stocks, driving prices higher not through productivity but through leverage. When the central bank later tightened policy, the reversal came too late; the system was already primed for collapse.
Second, flaws in the structure of the financial markets increased risk.
The keiretsu model saw the corporations and the banks tightly intertwined, which prompted speculative lending. Increasing values for the land were used as good collateral, perpetuating the loop: higher prices meant more loans were possible, and more loans propelled prices even higher. Regulators for the most part took a hands-off approach, emphasizing growth over prudence. When prices came down, the system had huge uncollectable loans.
Third, policy mistakes extended the downturn.
As markets became overheated, the Bank of Japan increased interest rates sharply, which caused the prices of assets to precipitously fall. But rather than quickly restructuring the banks and forgiving the bad loans, the policymakers dawdled for fear of undermining institutions. That helped the deficiencies fester, eventually yielding Japan’s fateful “Lost Decades.” Demographic issues, including an aging population, made the recovery all the harder.
Three lessons from these mistakes are available for Korea. The first concerns monetary discipline. Japan’s wild fluctuations in the availability of credit had the effect of making the bubble worse. To avoid this, the debt-service requirements and the loan-to-value ratios need to be steady, not encouraging adjustable-rate mortgages, and refusing the temptation of providing a surge of loose credit when the system comes under stress.
The second is early recognition of financial risks. Japan’s reluctance to acknowledge and resolve bad loans only deepened its crisis. Korea faces similar vulnerabilities today in project-finance lending and the jeonse rental system. These risks should be confronted with strict reviews, clear deadlines, and rapid restructuring before they spiral into systemic collapse.
The third one is system-wide stability. Korean housing and tax policies tend to change with political tides, and this perpetuates speculation. To avert this, regulations need to be steady and reliable. Supply of housing must increase where demand converges, approvals need to accelerate, and guarantees need to factor real risk when pricing. Concurrently, capital must be directed towards productive sectors by means of restructuring which enhances the process of governing and facilitating transparency.
It is also crucial to remember that bubbles harm not only economies but individuals. Families who stretched to buy homes with heavy mortgages may find themselves trapped in negative equity when prices fall. Young people, already locked out of ownership, face worsening inequality as housing becomes unattainable. Retirees who depend on rising asset values for financial security may see their wealth evaporate, forcing painful cuts to their standard of living. Workers in construction, banking, and related sectors are often the first to lose jobs when a bubble bursts. These human costs show why preventing bubbles is not just a macroeconomic necessity but a social one.
History confirms that speculative booms and busts are not confined to Japan or Korea. The Great Depression of 1929 began with a frenzy of stock speculation that collapsed almost overnight. The 2008 financial crisis, triggered by reckless lending and inflated housing markets, brought global hardship after the fall of Lehman Brothers. In every case, what seemed unstoppable quickly unraveled, leaving deep scars on societies and households. Japan’s case serves as a harsh reminder: unbridled speculation can turn growth into stagnation for decades. Korea need not follow the same route. Keeping credit in check, meeting risks head-on, and stabilizing the financial and housing markets, it may shield its economy as well as citizens. Whether the country relives Japan’s “Lost Decades” or forges a more resilient future rests upon today’s choices.
By: Yehoon Park
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