June 9, 2025
SEOUL – In the early 1990s, Japan seemed unstoppable. Decades of breakneck growth had swelled its asset wealth, and many believed the good times would never end. Then came the crash. A bursting real estate bubble ushered in what would become Japan’s “lost decades” — a prolonged era of stagnation and disillusionment.
Today, a similar unease hangs over South Korea. Just days into office, President Lee Jae-myung faces a stark warning from the Bank of Korea: Without sweeping reforms, the country risks sleepwalking into the same economic trap.
The central bank’s June 5 report offers more than a cautionary tale. It is a clinical diagnosis — and, crucially, a policy prescription — delivered at what may be a pivotal moment in Korea’s economic history. While the country’s transformation over the past half-century has been nothing short of extraordinary, the external tailwinds that once propelled its rise are now shifting.
Geopolitical fragmentation, technological decoupling and rising protectionism are eroding Korea’s long-reliable export model. At the same time, its domestic growth engines are sputtering. A rapidly aging population, lagging productivity and a troubling buildup of private-sector debt — much of it tied to real estate — are casting long shadows over the nation’s future.
The parallels with Japan are more than superficial. Korea’s private-sector debt stood at 207.4 percent of gross domestic product in 2023, edging closer to Japan’s 1994 peak of 214.2 percent. But Korea’s debt composition is arguably more precarious: household borrowing accounts for 45 percent of the total, compared with 32 percent in precrisis Japan. And whereas Japan once had the demographic breathing room and institutional depth to cushion the blow, Korea faces steeper challenges: faster population aging, thinner household savings and limited fiscal space.
What makes the BOK’s warning especially urgent is the structural nature of these risks. Too much capital continues to flow into low-productivity sectors, particularly real estate, starving innovation and technology of critical investment. Speculation has inflated property values, but it has also left households increasingly exposed. A rise in interest rates or a dip in home prices could suppress already-strained consumer spending and threaten broader growth. In a country so reliant on private consumption and exports, that is a dangerous mix.
To its credit, the central bank is not merely sounding the alarm. It draws key lessons from Japan’s experience, calling for proactive debt restructuring, demographic reform and a move away from temporary monetary fixes toward lasting structural adjustment. Growth, it argues, cannot be manufactured through stimulus alone. It must be built on a foundation of resilience.
This moment demands political courage. New administrations are often tempted to chase quick wins rather than face hard truths. But Japan’s experience offers little comfort to those who hesitate. There, resistance to reform and a deep aversion to political risk allowed imbalances to fester until the consequences became inescapable. Korea cannot afford the same mistake. The warning signs are clearer this time. The stakes are higher.
To chart a new course, the Lee administration must rebalance Korea’s economic foundations. That means confronting household debt, however politically unpopular. It means shifting capital from speculation to innovation, from concrete to code. And it means addressing demographic decline not with nostalgia, but with bold policies that expand labor participation, support families and welcome skilled immigration.
In “Peak Human,” his chronicle of flourishing civilizations, Swedish historian Johan Norberg observes, “Failure is not a fate but a choice.” Korea now stands before such a choice — between the discomfort of reform and the comfort of inertia. The echoes of Japan are not destiny; they are a warning. And warnings, left unanswered, tend to become history.