Debate escalates over Korean QE

Former Finance Minister Kang Bong-kyun, who coheads the ruling Saenuri Party’s campaign for the April 13 general election, has stirred up debate over whether drastically easing monetary policy is needed to boost the country’s sluggish economy.

At the inaugural meeting of the campaign committee last week, Kang floated the idea of the central bank printing money to purchase industrial finance bonds and mortgage-based securities in order to tackle the two key tasks facing the economy -- overhauling profitless and heavily indebted companies and defusing a potential crisis from mounting household debt.

The former top economic policymaker has since repeatedly emphasized the need for implementing what he dubbed a Korean version of quantitative easing to differentiate it from broader asset purchase programs that have been put in place in other advanced economies. He argues that interest rate cuts are no longer instrumental in ensuring the smooth flow of liquidity and thus the central bank needs to put money directly into specific troubled segments.

The main opposition The Minjoo Party of Korea has criticized Kang for trying to revive a failed policy. What it is focusing on is economic democratization, a concept that is understood as exerting efforts at curbing the influence of large business conglomerates and reducing income inequality that has been polarizing the Korean economy and society.

Kang and the opposition’s interim leader Kim Chong-in have exchanged barbed words, describing one another as ignorant of the latest global economic trends.

Kang’s proposal seems to have been endorsed by many Saenuri officials as enabling the party to take an initiative in presenting economic policy pledges. But it has drawn negative or at least lukewarm response from policymakers at the Finance Ministry and the Bank of Korea.

“I don’t think it’s the party’s official election promise, but chairman Kang’s individual belief,” said Finance Minister Yoo Il-ho shortly after Kang made public his idea. This blunt reaction might be natural, given Yoo has advocated fiscal soundness.

During a meeting of economy-related ministers days later, he also dismissed the possibility of drawing up a supplementary budget down the road to help bolster growth.

The central bank has refrained from giving an outright response to Kang’s proposal. But BOK Gov. Lee Ju-yeol appeared out of tune with the former minister’s initiative last week when he voiced opposition to an additional rate cut in the near future.

“The BOK will continue to use its monetary policies in a way that will best support economic growth,” he said in a meeting with reporters. “But growth requires not only monetary tools but also other economic policies and structural reform.”

The BOK has kept its key rate at a record low of 1.5 percent since June 2015, following four rate reductions in less than a year.

Economists with cautious views indicate any form of quantitative easing can and should be considered after the interest rates are down near to zero percent. They also express worry that loosening monetary policy will do little to stimulate the economy and only destabilize financial markets, prompting foreign capital to flow out of the country.

“Our economy is not in a situation that urgently needs quantitative easing, which may aggravate problems with households, corporations and fiscal balance,” said Park Jin, professor at the Korea Development Institute School of Public Policy and Management.

Chun Sung-in, professor of economics at Hongik University in Seoul, raised the possibility that purchases of bonds issued by the state-funded Korea Development Bank might cause a dispute at the World Trade Organization, if other countries suspect the money was used to support certain local companies in a specific way.

Kang’s proposal, however, has drawn support from a group of economists and economic commentators who see government and central bank policymakers as too cautious, and even timid, in mobilizing policy tools to boost the economy that is losing steam.

They note it is necessary to take far more drastic and preemptive measures beyond market expectations at a time when interest rate cuts can do little to help reinvigorate the economy.

The opposition party was incorrect to define Kang’s initiative as a failed policy. It may be more accurate to call it a policy untested in the country.

Proponents of the idea say it should be remembered that quantitative easing policy failed to bring hoped-for effects in Japan and the eurozone as it was not bold and swift enough to ease concern over sliding economies in the years following the 2007-08 global financial crisis.

“U.S. quantitative easing has been successful as it was prompt and focused on more vulnerable sectors such as mortgage loans,” said Kim Sang-jo, professor of economics at Hansung University in Seoul.

Those who support the country going for a form of quantitative easing note that the central bank should avoid falling into a timidity trap when the economy is becoming trapped in a low-growth rut.

By Kim Kyung-ho (khkim@heraldcorp.com)