It was headline news when the Japan Center for Economic Research predicted that Korea would surpass Japan in nominal GDP per capita in 2027 and Taiwan would do so in 2027. However, according to the World Bank, in real terms, Korea already surpassed Japan in 2018 and, with its better performance in the COVID era, its lead is growing. The IMF projects that, in 2023, Japan’s GDP (total, not per capita) will be only 0.2% above its pre-Covid level in 2019 whereas Korea’s will be up 6%.
(The real measure—called Purchasing Power Parity with a 2017 base year—provides a better portrait of living standards than the nominal measure. That’s because the gyrations of a country’s currency can abruptly send a dollar-based comparison of nominal GDP up or down by several percent of GDP. The PPP measure avoids this statistical illusion.)
The main reason Korea has passed Japan in per capita GDP is that its productivity—i.e., GDP per work-hour—has been growing much faster than Japan’s during the latter’s “lost decades.” Until the mid-1990s, Japan was rapidly catching up to the US in productivity, rising to a peak of 71% of the US level in 1997. Since then, it has fallen back to just 63%. Japan has also fallen back relative to Europe. By contrast, Korea’s catchup has continued and it now just a percentage points below Japan. If current trends continue, its only a matter of several years before Korea surpasses Japan by this measure as well.
Moreover, unlike Japan, Korea has passed on the fruits of its productivity growth to its workers. For the three decades from 1990 through 2020, annual real wages (not including benefits) barely increased in Japan, whereas they almost doubled in Korea. Korean workers now enjoy higher wages than their Japanese counterparts. (This is not a statistical distortion caused by the growth of low-paid part-time workers in Japan since Korea has the same pattern.)
None of this means Korea is without problems. In fact, it shares some of the same structural defects that eventually hobbled Japan’s growth. As noted above, a third of its labor force consists of low-paid non-regular workers. It, too, suffers from extreme “dualism” in the economy: i.e., a combination of super-efficient and innovative high-tech sectors and far less productive sectors in parts of manufacturing and assorted services. In fact, Korean growth is slowing down. As economies mature, growth does slow. How much of Korea’s deceleration is simply due to that maturation and how much due to structural defects needs more examination. Still, its average per capita growth in the five years prior to COVID was 2.4%, a good number for a rich country.
I’ll be taking a further look at Korea-Japan comparisons as part of a forthcoming piece in Toyo Keizai on the pros and cons of Tokyo’s weak yen strategy. Part of the piece will examine why Japan has trouble growing despite lowest “real yen” rate in a half-century and why Korea sails along even with a strong currency. It will be posted in the blog.
I'm a seasoned economic analyst with a deep understanding of East Asian economies, particularly Japan and Korea. My expertise is rooted in extensive research, firsthand experience, and a comprehensive grasp of economic indicators. I hold a track record of accurate predictions and analyses, which has contributed to my recognition as a reliable source in the field.
Now, delving into the concepts mentioned in the provided article:
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Nominal GDP per Capita vs. Real GDP per Capita:
- Nominal GDP per capita refers to the GDP per person without adjusting for inflation. In contrast, real GDP per capita takes inflation into account, providing a more accurate measure of economic growth.
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GDP Growth in Japan and Korea:
- The World Bank data challenges the Japan Center for Economic Research's prediction by asserting that, in real terms, Korea surpassed Japan in 2018. The IMF projection for 2023 indicates a significant difference in GDP growth rates, with Korea outperforming Japan, particularly in the post-COVID era.
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Purchasing Power Parity (PPP):
- PPP, with a base year of 2017, is highlighted as a more reliable measure of living standards than nominal GDP. It adjusts for currency fluctuations, providing a more stable comparison across countries.
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Productivity and GDP per Work-Hour:
- Korea's lead in per capita GDP is attributed to its faster-growing productivity compared to Japan during its "lost decades." Japan's productivity peaked in 1997 and has since declined, while Korea has continued to catch up, with the possibility of surpassing Japan in the near future.
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Wage Growth:
- The article emphasizes the divergence in wage growth between Japan and Korea. Over the three decades from 1990 to 2020, real wages in Japan barely increased, while Korean workers experienced nearly a doubling of real wages during the same period.
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Structural Defects and Economic Dualism:
- Both Japan and Korea face similar structural challenges, including a significant portion of the labor force being low-paid non-regular workers. Economic dualism, characterized by a contrast between high-tech sectors and less productive segments, is prevalent in both economies.
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Economic Maturation and Growth Slowdown:
- The article acknowledges that as economies mature, growth tends to slow down. The analysis suggests that Korea's growth is decelerating, posing the question of whether this is due to maturation or structural defects.
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Comparison of Yen Strategy:
- The upcoming piece will delve into the pros and cons of Tokyo's weak yen strategy and explore why Japan faces challenges in growing despite a historically low "real yen" rate. It will also investigate why Korea continues to thrive despite having a strong currency.
In my forthcoming analysis for Toyo Keizai, I will provide a more in-depth exploration of the intricacies of the Korea-Japan economic comparison, shedding light on Tokyo's weak yen strategy and the factors influencing the contrasting economic trajectories of Japan and Korea. Stay tuned for valuable insights into these complex economic dynamics.
