Rhee Chang-yong could be excused for never wanting to hear the word 'Legoland' again.
The Bank of Korea governor spent the first six months of his tenure pushing back against criticism that his team is tightening too much. Since presiding over Korea’s first-ever half-point increase in July, Rhee has been the subject of gripes from economists and the Financial Services Commission. One People Power Party lawmaker called the BOK “sadistic.”
Then Asia's largest theme park entered the discourse with a mid-October default on debt.
The Legoland crisis was quickly framed as a microcosm of how stumbling credit markets pose a dilemma for the BOK. On one hand, Rhee needs to keep pace with the US Federal Reserve hiking rates in 75-basis-point steps. On the other, liquidity troubles in bond and money markets are pressuring the BOK to throttle back on fighting inflation.
The global economy needs Rhee to stand firm. That goes, too, for his peers from Washington to Tokyo.
Since August 2021, the BOK has been in the international spotlight. It was then that it became the first major monetary authority to hike rates amidst the pandemic. That move, under Rhee’s predecessor LeeJu-yeol, was a confidence booster in Asia. A welcome sign that economic conditions were stabilizing.
It was a reminder, too, of Korea’s role as a bellwether economy. It put the BOK miles ahead of Fed Chairman Jerome Powell, who was still in denial about the inflation surge to come. And now, the pressure facing Rhee’s BOK is a reminder of why the global economy is in such peril.
Had Powell’s team followed the BOK’s lead 14 months ago, US inflation might not be racing ahead at a nearly 8% annual rate. True, much of the surge in prices reflects dynamics beyond the Fed’s control, from supply-chain troubles to Russia’s Ukraine invasion driving up oil prices.
But had Powell put a rate hike or two on the scoreboard in mid-to-late 2021 -- like the BOK -- inflation expectations might not have careened out of control. Global markets are paying the price for Powell’s failure to do his job.
This started well before Covid-19 entered global headlines. Back in July 2019, Powell bowed to then-President Donald Trump’s bullying. Never before had a US leader publicly threatened to fire a Fed chief. And never before had a Fed leader so shamefully caved in to political meddling.
The Powell Fed began cutting rates when the largest economy didn’t need it. That drove stocks even further into bubble territory. It added excessive liquidity into the financial system that almost certainly made the US more susceptible to the worst inflation jump in 40 years.
Asia is paying the price for that act of monetary cowardice. As the Fed frantically tries to catch up with inflation, markets were caught in the crossfire. No threat loomed larger than the dollar’s historic bull run. As the dollar surged, the yen fell to 30-year lows and the won dropped to levels not seen since the 2008-2009 Lehman Brothers crisis era.
For Rhee, the easy thing would be to announce a pause on BOK rate hikes. He could say the BOK is done tightening and simply channel cash to companies caught up in the turmoil surrounding Legoland and other corporate borrowers on the edge.
That would be a mistake. No one wants the BOK to push Asia’s fourth-biggest economy into recession. And clearly, the 5.7% year-on-year drop in exports in October is a troubling signal China’s slowdown is reverberating Korea’s way. And “external demand conditions are not expected to improve in the short term,” says economist Min Joo Kang at ING Bank.
But the lessons from the Bank of Japan should be top of mind for Rhee’s team. A major reason why Japan’s economy is still limping along is too many decades of BOJ leaders keeping the monetary spigot on the 'high' setting. That deadened the urgency for Japanese lawmakers to increase competitiveness and level playing fields. It relieved pressure on companies to innovate, increase productivity and welcome more women and foreign talent into boardrooms.
Korea must avoid this fate. The BOK can do its part by not making life too easy for President Yoon Suk-yeol’s economic team, which should be recalibrating growth engines. Nor should the BOK relieve pressure on CEOs to devise game-changing technologies and products to accelerate Korea’s journey into the ranks of the top-10 economies.
It's all about getting the building blocks right. The Legoland saga is indeed a cautionary tale. But Rhee’s BOK needs to stay focused on where it can help Korea’s development as an advanced economy, not acquiesce to politicians looking for ways out of doing their jobs.
By William Pesek
William Pesek is an award-winning Tokyo-based journalist and author of Japanization: What the World Can Learn from Japan's Lost Decades. Previously, he was a columnist for Bloomberg and Barron’s.
