South Korea’s President Plays the Japan Card: Will It Be Enough?

South Korean President Lee Jae Myung has been making waves in recent weeks by invoking Japan’s infamous property crash of the early 1990s as a warning about his country’s own overheating real estate market. This comparison is apt, but it raises more questions than answers about Seoul’s ability to avoid a similar fate.

Lee’s comments were made in the context of his government’s efforts to revise taxes aimed at stabilizing the housing sector. Real estate accounts for the largest share of South Korean household wealth, with 75.8% of Korean household assets tied up in real assets as of end-March this year. This is a staggering level of concentration that has experts warning about the dangers of an asset bubble burst.

Some economists are skeptical of Lee’s comparison with Japan, arguing it may be an overreaction. Kang Min Joo, senior economist for South Korea and Japan at ING, notes that mortgage lending conditions have been relatively tight for several years, with authorities maintaining strict controls on loan-to-valuation and debt-to-income ratios.

However, others are more cautious, pointing out that while the risks of a bubble burst may be low in the short term, they can’t be ruled out entirely. Ma Tieying, senior economist at DBS Group Research, highlights South Korea’s high credit-to-GDP ratio and stock market capitalization as potential flashpoints for instability.

The question is whether Lee’s government has done enough to prepare for a potential downturn. The answer is unclear, but one thing is certain: the stakes are high. With real estate accounting for such a large share of household wealth, a crash could have far-reaching consequences for individual households and the broader economy.

Lee’s own record on economic policy is mixed. As a presidential candidate, he pledged to boost the benchmark Kospi index to 5,000, but this goal was achieved briefly in January last year before slipping back down due to volatility in the tech sector.

The Bank of Korea has responded to inflation and financial imbalances with interest rate hikes, but some experts worry that this may not be enough to prevent a downturn. Ma Tieying notes that South Korea shares several financial and demographic characteristics with Japan, which could make it more vulnerable to a property crash.

In the end, Lee’s gamble on invoking Japan’s property crash may prove to be a winning strategy if he can back up his words with concrete action. The question is whether his government has learned from Japan’s mistakes or is simply repeating them.

The next few months will be crucial in determining South Korea’s economic trajectory. Will Lee’s government take bold action to stabilize the housing sector, or will it rely on rhetoric and symbolism? Only time will tell, but one thing is certain: the stakes are high, and the outcome could have far-reaching consequences for individual households and the broader economy.

The clock is ticking, and South Korea’s President has just played his trump card. Now it’s up to him to deliver.