Blame Foreign Speculators? They HELP Korea, Not Hurt It

Koreans Love to Blame Foreign Speculators
You can easily find that Koreans based in Korea often blame foreign speculators for the volatility of Korean markets and assets in general. In the Korean press, you will be able to find not-so-subtle articles which suggest that foreigners are responsible wild gyrations in asset prices.  Sometimes, the blame rises to a fever pitch, and political decisions get made which are totally unjustified when you apply internationally accepted norms.  Not norms only accepted by the U.S., but by the global community as well.  As Korea matures into a first-world country, these political decisions are not favorably received by the global community.  The Seoul Gyopo Guide has pointed out, on multiple occasions, that the KEB debacle was completely unjustified, and motivated by political whim only.  The reality is that over the past few years, Korea has benefited greatly from foreign speculators' movement of money around the world.

Korea Has Benefited a Great Deal Because the Yen is Strong
For those that have read the Seoul Gyopo Guide in the past, this headline is no surprise.  Korea has feasted on one simple fact:  the Japanese Yen is very strong, for a number of reasons, and that has made Japanese products too expensive in the international marketplace, and in many cases, has severely hurt Japanese company profitability.  Toyota, Sony, you name it, they have been hurt by Japanese Yen strength.  Who has benefited?  Hyundai-Kia and Samsung Electronics (and others).  We can debate this or that feature but the fact is that these products by Japanese and Korean companies are very competitive with each other.  The reason that has occurred is because Korean companies have used their gains in the international marketplace to improve the quality of products produced.  Those gains were the result of the fact that Korea's products were cheaper compared to Japanese products due to the JPY/KRW exchange rate.  Twenty years ago, no one would compare a Sonata with an Accord.  Today, that is very much the case.  Korea has the strong Yen, in no small part, to thank for that.

Why is the Yen So Strong If Its Economy is in Decline?
There are a large number of reasons for this and too numerous to completely analyze here.  However, here are a few.  First, Japan has an economy where its debt, though very large, is largely owned by the Japanese.  As a result, you don't have foreign investors selling Yen-denominated securities every time it is more clear that the Japanese debt burden is large.  The ratings agencies have downgraded Japan recently.  The Japanese Yen didn't move appreciably.  Second, the stability of the debt, coupled with the stagnant Japanese economy, has led to the "Yen carry trade."  It has allowed foreigners to convert into Yen, and then pay back the Japanese interest rate, which has remained close to zero because of the stagnant Japanese economy. So, when there is increased risk around the world, investors convert their currency into Yen.  That is exactly what has occurred over the past week, and over much of the past few years, as governments around the world have borrowed money from foreign investors.  Where has that not occurred?  Japan.  The result, the Yen, which should otherwise be weak, has remained strong relative to other global currencies, and the Korean Won.


The Korean Won / Japanese Yen FX Rate Hasn't Moved
In fact, the rate as of this writing is approximately 13.6.  Before the financial crisis hit, that rate was around 8.0.  Amazingly, the Korean Won has actually weakened compared to the Japanese Yen since the beginning of 2010.  That has been to Korea's corporate benefit.  The reason that there are so many more Japanese and Chinese tourists around Myung-Dong?  Korea is cheap compared to their own markets.
Now, part of this is explained by the Bank of Korea's intentional policy.  The BOK has a difficult task, because a weak Korean Won has caused increased inflation.  For example a Korean Won can buy fewer imports because the import is priced in its own currency.  It isn't all good news that the Korean Won has not strengthened greatly against foreign currencies. Nevertheless, the idea that foreign speculators are to blame is a misguided notion.

Conclusion
The Lost Seoul is qualified to write in-depth posts around this topic but is more interested in the central theme: Korea will have to deal with the effects of joining the elite nations of the world.  Critics of the government and policy makers will need to take this into account before throwing out inaccurate statements and criticisms  which no longer apply.  The rules of competing on a global playing field, with and against competent, global competitors are not easy to manage, nor should they be.  Old-fashioned thoughts and criticisms applied when Korean companies did not make world-class products.  Old-fashioned criticism against the government don't work because while Korean products are world-class, the restraints of small population, small geographic size, and lack of natural resources are unique to Korea when compared to Germany, Japan, and the U.S.  As a result, policy must take this into account, and critics must as well.
These are "high-quality" problems.  A "high-quality" problem is one that occurs because Korea has successfully used the past few decades to make unprecedented progress on the global economic stage.  Other "emerging market" countries have not had to deal with the same restraints that Korea has faced and overcome.  Brazil?  Enormous amounts of natural resources.  China?  1.4 Billion people.  India?  1.1 Billion people.  Foreign speculators are not the root of the problem:  the issue is that Korea faces unique challenges as it stares down Toyota, Siemens, and Ford on the global stage.  Blaming foreign investors as wild speculators have actually created Yen appreciation, which has, and continues, to benefit Korea.

Criticism of the BOK's Decision is (Largely) Unfounded

The Bank of Korea Has Taken Criticism for its Recent Decision
 The other day, the Bank of Korea (BOK) kept its target interest stable, which was different from market expectations.  Market participants widely believed that another rate increase would occur. In the Wall Street Journal's Korea Blog, it was reported that the Bank of Korea has received a great deal of criticism about this most recent decision.  The Seoul Gyopo Guide believes that over time, interest rates must increase in Korea.  However, the criticism for the most recent, one-time decision, is unfounded because the situation is far more difficult than has been reported.  The Seoul Gyopo Guide has described the Bank of Korea's difficult position here, three weeks ago.  This difficult balancing act is one that the Bank of Korea will need to perform for the immediate future.
  
Demand Pull Inflation?  Not So Fast. 
Some economists would suggest that Korea has faced something called "demand-pull inflation," which is that everyday Koreans are trying to buy more items, such as food, clothing, entertainment, and durable goods like appliances.  Really?  Anecdotal evidence doesn't suggest that.  While department store sales have increased, the fact is that there isn't a shortage of items for sale in the stores.  In fact, popular imported items have increased in price due to the relative weakness of the Korean Won compared to its counterparts, such as the Euro.   That said, it is undoubtedly true that credit card companies have loosened their standards of lending considerably, which has added liquidity to the domestic Korean economy.
Much of the reason that everyday Koreans may be more confident is because they know that Korean companies are prospering in the international marketplace.  It is the case that the weak Won relative to other currencies, especially the Japanese Yen, has contributed greatly to this.  The Seoul Gyopo Guide has written about this a number of times.  A reversal of this will make Korean products less competitive from a price perspective, which would, in turn, cause lower Korean corporate profits.  Korean consumer confidence would fall, and the current optimism would fade.  A sharply higher interest rate would make the Won rise.

The Real Estate Problem
The elephant in the room is the fact that the Korean real estate market is in trouble. In Gangnam, the district of Seoul of the most expensive apartments in Seoul, the price of only the most expensive apartments is stable.  Apartments in the USD 1,000,000-3,000,000 range have dropped during the past two years.  Lower real estate prices are especially damaging to Koreans, because Koreans have a larger percentage of their entire net worth invested in their homes.  The number one factor in real estate prices?  Interest rates.  A rate increase by the BOK would only serve to worsen the situation.  In the United States, the US Federal Reserve has fought very, very hard, to keep interest rates lower to slow the rate of price declines of real estate.  It can be argued that this will not end well, but it shows just how important that the US Fed believes that the value of real estate is the US economy.  In Korea, where the percentage of overall wealth spent on real estate ownership is higher than in the US, can the economic logic be much different?  No. 

The BOK Needs To Maintain Its Right to Be Unpredictable
If you knew for sure that the price (of anything) would be higher tomorrow, then the price would be higher today.  You don't need an economics degree in order to understand this.  Interest rates can be defined as the price of money.  So, if the Bank of Korea was entirely predictable in the direction and timing of its interest rate moves, than that, in itself, would be self-defeating.  The BOK needs to have the element of surprise in its decisions.  The reasons?  First, it must maintain its ability to intentionally shock the markets.  Gradual interest rate changes do not accomplish this.  The reason for the need to shock the markets is that the BOK needs to be able to communicate to the domestic and international marketplace that there is an urgent need for interest rate changes.  Second, the BOK needs to be able to move in large increments should conditions warrant.  Why?  The world remains unstable in the fallout of the financial crisis.  The huge amount of governmental stimulus has created imbalances around the world.  That has made different locations (Greece, Ireland, Middle East) subject to wild changes in fortune.  Due its small size, small population, and very dense concentration in profits among a very few industries, the BOK must maintain all its options to the fullest extent possible.  The element of surprise is one of those options.

Opinions
One of the reasons for creating the Seoul Gyopo Guide was to educate those unfamiliar with the Korean economy about Korea.  Along with that, native Koreans themselves must understand how Korea fits within the global market, where capital moves rapidly.  In some ways, Korea is very prepared for that.  Its end products are world-class in many industries.  However, in other ways, Korea has not found the proper balance between openness to capital flows and its pursuit of economic independence.  Complete economic independence is not possible unless Korea annexes larger, more heavily populated countries, which are rich in natural resources, in a peaceful manner.  In other words, it is virtually impossible.  The Bank of Korea is reacting properly to this by maintaining its maximum flexibility.  Criticisms of being a "tool of the administration" may be, in part, true.  However, given Korea's small size and inherent vulnerability, the BOK can accept that misguided criticism in favor of its pursuit of a combination of economic growth and price stability.  Displacements in the Korean economy have a much larger effect than those that occur in larger countries like the US, or regions like the EU.  As a result, applying the same type of logic that works in those areas don't necessarily work for Korea.  Nevertheless, every decision that the Bank of Korea is, by its nature, controversial, and there will be Monday morning quarterbacks giving their opinion after each decision.  Undoubtedly, the Bank of Korea is ready to accept that consequence.

North Korean-Chinese Agreement on Raw Materials is a Troubling Development (update 1)

Bloomberg Reported on North Korean-Chinese Rare Earths Deal
Readers of the Seoul Gyopo Guide knew this prior to Bloomberg's report, which was published on February 8th.  Below, the Seoul Gyopo Guide's February 6th report and a quick analysis of the ramifications to the South Korean economy, and its potential effect on North-South Korean relations, is posted below.

It's No Secret:  China's Economy's Growth Has Benefited South Korea
It is a well-known fact that the economic development of China has been very rapid, as it has grown at basically 8-10% per year for almost the past 30 years.  The impact on the global economy has been enormous. The largest Korean companies, Samsung Electronics, Hyunda-Kia Motor Corporation, LG Electronics, Hyundai Heavy, SK Energy, POSCO, to name a few, have benefited \during this time.  The revenues earned \by the largest Korean companies have funded research and development efforts which have yielded global market share gains versus its global competitors, including the Japanese.  Globally, Korean companies are at least on par with their global competitors as measured by almost any measure.  The Seoul Gyopo Guide has pointed out that the relatively weak Korean Won has also played a very strong role in this.

China's Growth Has Kept Down Global Inflation.  For Now.
The reason that "inflation" on a global level has been subdued over the past 20 years has been largely due to the fact that China has absorbed much of the price pressures that would have otherwise occurred.  As demand has increased in other parts of the world, China supplied cheap items at an almost-endless rate, it would seem.  China has been able to do this because it is trying to transition 1.3 billion people out of its rural living into cities and a modernized economy.  Doing this has been no small feat.
However, the slow-moving train of global inflation seems to be picking up steam around the world.  Korea has also experienced this.  As those same 1.3 billion people have gradually become wealthier, they have become consumers on their own as well.  As the Chinese economic evolution continues, China will demand raw materials in order to continue it development.
The problem:  the supply of raw materials is in question and the demand continues unabated.  The result:  inflation for raw materials of almost every type.  China, once the great dampening force on global inflation, is becoming the great source of global inflation.

China's Delicate High-Wire Act
As a centrally planned economy, China has looked into the future, which means that its time horizon is more than 5 clicks on the internet.  Its demand for raw materials, and energy resources, has been undeterred by almost any economic shock over the past 2 decades.  Many in the financial markets would suggest that China has hoarded certain raw materials.  It is understandable to see why.  Take copper, for instance.  Copper is the one metal which is absolutely essential for construction.  Over the past 20 years, the price of copper has tripled, even with global output increasing by over 50% during that same time.
At a time that China is trying to grow its economy, it must also try to quell inflation.  Inflation has historically been the reason that governments are thrown into turmoil.  Many countries today are facing this as food shortages coupled with inflation have made the general populations...uneasy, to put it mildly.  The Chinese Central Bank is playing a very delicate balancing act indeed.
Out of Singapore, this article appeared, and it can, almost all by itself, explain why China won't allow a war between Koreas, and why this can fundamentally change the nature of the North-South Korea relationship.

If True, North Korea's Raw Materials Reserves Are Enormous
According to the CIA, North Korea's GDP in 2009 was about $40 Billion.  According to the AsiaNews site above,

South Korea estimates the total value of mineral deposits in North Korea at 6.3 trillion dollars.

"The agreement contains a specific list of mines to be developed...including gold, anthracite coal and rare earth mineral mines," Yonhap quoted a source familiar with North Korean affairs as saying.

Well, how much is $6.3 trillion dollars?  Let's say there are 25 million people in North Korea.  That is $252,000 per person.  This is not to say that North Korean citizens will instantly become $252,000 wealthier (yes, I have received this type of email).  It simply gives you an idea of how much money that is, and its effect on the relatively small North Korean economy.  This is actually a HUGE understatement of the potential effect because of the associated infrastructure that will need to be built in order to extract those raw materials. This has occured in the past, as reported in the Washington Post in 2008.
 
Most recently, China has threatened to cease the export of minerals called 'rare earth' metals.  The reason for this is that those rare earth metals, although used in very small quantities, are critical for technology manufacturing.  It is yet another reason that the $6.3Trillion estimate may be too low, i.e. it will not take into account the potential for much higher prices of rare earth metals.

If True, North Korea's Raw Materials Reserves Are a Game Changer
Development of raw materials extraction could not come soon enough for the North Korean economy.  How this develops will be interesting, and potentially can strongly affect the North-South Korean dialogue, as well as how Korea fits in the greater regional geopolitical structure.
Readers of the Seoul Gyopo Guide know that the writer believes that war on the Korean peninsula is unlikely at best.  The bottom line is that there are too many parties who have too much to lose if there is a widespread war on the Korean peninsula, and the Korean people are unlikely to wage war with one another (self-defense is another, more complicated matter, and that is why President Lee has taken harsh, well-deserved criticism, for his administration's handling of recent events).  Development of raw materials is critical to China, which further supports the Seoul Gyopo Guide's claims.  There are other issues to consider.  First, the Chinese are likely to strike exceptionally favorable terms from North Korea, given North Korea's economic woes.  It is not hard to imagine that any agreement is tied to further economic assistance from China to North Korea.  Second, the question will remain on where those revenues will go.  If the revenues are diverted for military development, then this would be a source of funds that could be very dangerous to the North-South Korean standoff.  Third, South Korea itself could be greatly disadvantaged compared to Chinese competitors.  Already, China poses a threat to certain important Korean industries.  A steady supply of raw materials at below-market prices would be a great advantage for China-based corporations.  Any one of the three issues may prove to be a flashpoint:  the combination of all three is particularly intriguing. 

Conclusions
South Korea, too frequently, is a mere spectator to large, transformational changes in the global economy.  Most of this is not due to anything that the South Korean government has done.  South Korea remains small geographically, without many raw materials resources of its own, and with a relatively small population.  These limitations make South Korea's rapid economic development even more amazing in many ways, especially in light of the fact that there has been continual, competent competition from foreign-based companies (ever hear of Toyota or Sony?).   Until now, South Korean economic and monetary policy have provided a shield for South Korean industries which has allowed these industries to become global leaders.  However, it is a story yet uncompleted because Korea is not China, and the fact that such a large economy has levers that can be used to disadvantage South Korea is troubling.  This will not happen overnight, and how raw materials are developed in North Korea is still yet to be determined. Nevertheless, the potential effects of North Korean-Chinese cooperation on the development of sorely-needed raw materials could be enormous.

Clearly, this post needs to be expanded greatly, and will be expanded in upcoming updates.
Please "Like" this post and/or follow me on Twitter.

Japan Downgraded: Korea Needs to Avoid Deflation

You Know It's a Problem When...Japan Downgraded by Moody's
Today, Japan was downgraded from AA to AA- by Moody's, one of the two most important ratings agencies.  These agencies are widely used by global investors when they consider whether or not a country's government will be able to repay its debts.  We can debate, and there are those that would sharply criticize whether or not these ratings agencies are useful, given the fact that they have largely missed the financial crisis on a systematic basis.  Nevertheless, it is still true that investors pay attention when large changes to ratings occur, especially to economies that are the size of Japan.  While there is no imminent risk to Japan, this gesture does reflect many of the things that the Seoul Gyopo Guide has pointed out on numerous occasions.  In fact, this post, which challenges why Koreans continue to learn the Japanese language, is one of the most-read posts on the Seoul Gyopo Guide.

The Japanese Quagmire:  Deflation
Recently, this article was written about Japan (Bloomberg.com).

Their (Japanese companies) advantage may be Japan’s disadvantage. Prices in Japan as measured by the gross domestic product deflator have declined almost without interruption since 1994. That has muted the effect of falling wages and provides a cautionary tale for Federal Reserve Chairman Ben S. Bernanke, who has been lecturing on deflation’s perils as a central banker since 2002.

“It’s (deflation) extremely corrosive,” said Richard Jerram, Singapore-based head of Asian economics at Macquarie Securities Ltd. “The problem is, it’s not a spectacular problem in any given month or quarter.”

Deflation will steadily sap nominal growth, depriving the government of revenue, until one day Japan will no longer be able to finance its borrowing, Jerram said. The country will either default on a debt of about twice the size of the economy or debase its currency to reduce the real value of liabilities.

What does any of that mean?  It means that deflation, over long periods of time, can result in the inability of those with lots of debt (like Japan) to either default, or to depreciate their currency (the Yen).  Today's downgrade of Japan by Moody's reflects this problem.  The downgrade's affect alone could very bad for Korea for a variety of reasons.  First, there are many, many Japanese tourists visiting Korea (go to Myung-dong sometime, all you hear is Japanese and Chinese, it seems).  If the JPY depreciates sharply, then the Japanese will not be able to afford to visit Korea.  Second, a depreciation in the JPY will make Korean-made products more expensive on the international marketplace.  Followers of the Seoul Gyopo Guide know that Korean corporations have feasted due to Korea's relatively cheap Won, when compared to the Japanese Yen.

The Korean Problem is Different But an Easy Answer is Difficult to Find
Korea, as everyday Koreans know, faces inflation which is higher than the officially reported rate (people living in Korea are now all vigorously nodding their heads in agreement).  You know that inflation is a problem when the English-written news sites report it.  Well, that has now occurred. The problem actually is not inflation per se, but the real problem is that wages and nominal wealth (checkbook balances, stock market holdings, real estate values, etc) are not increasing at the same rate.  This has been due to a large number of different problems.  The result is that the average Korean feels poorer even though the employers (companies) continue to perform well.
The Seoul Gyopo Guide has suggested that greater amounts of equity must be owned by employees.  Korean employees have been very reluctant in the past to receive compensation in the form of stock.  The problem with this is that cash does not have the possibility of appreciating at the same rate as inflation.

Korea Needs to Avoid The Japanese Example
Some of the Japan's problems may have been unavoidable, but Korea needs to observe, and prevent some of the causes for the current situation in Japan.  First, it is clear why US Federal Reserve Chairman Bernanke has been trying to avoid deflation:  Japan has unable to escape deflation's clutches for two decades.  Second, there is the longer-term issue of an aging population, who do not spend on the newest products and who do not treasure the newest innovations.  This is a little-mentioned, but critical factor in understanding why Korea has prospered.  Young Korean consumers demand the newest features, and thus, Korea serves as a "testing ground" of sorts for the global marketplace.  While it is a blatant stereotype to suggest that Korean consumers are choosier than almost any other consumer group in the world, it may, in fact, be true.  (If a product fails in Korea, then it is likely to fail abroad.  In addition to the joint ventures that Korean companies have had with US-based entertainment companies such as Dreamworks SKG, many first-run films actually open in Korea for this reason.)  Third, Korea must avoid huge national indebtedness.  This point should be obvious, given that the IMF crisis was largely the result of the huge debt overhang in Korea.
Many aspects of life in Korea reflect Korea's reluctant jealousy of Japan.  Korea's corporate structures and methods could (although not exclusively) resemble Japan's.  Both countries are highly dependent on foreign energy resources.  Korea may not, over time, be able to avoid some of the larger forces at work in Japan, such as an aging population.  However, many of Japan's difficulties can be avoided so that Korea does not suffer from Japanese-style deflation.

Korea Is A Safe Haven...For International Child Abduction. Not Good. (Update 1)

Update 1 is at the End of this Post

Korea Faces More International Child Custody Controversies
The Hague Convention of 25 October 1980 on the Civil Aspects of International Child Abduction is a multilateral treaty, which seeks to protect children from the harmful effects of abduction and retention across international boundaries by providing a procedure to bring about their prompt return. The "Child Abduction Section" provides information about the operation of the Convention and the work of the Hague Conference in monitoring its implementation and promoting international co-operation in the area of child abduction. (Hague Conference on Private International Law, a global inter-governmental organisation.)
This is a list of Hague Abduction Convention Countries.  Conspicuous by its absence?  South Korea.  This is going to be a huge problem for Korea.  First, it is well-known that international marriage is increasing in Korea and abroad.  The reason?  Koreans are migrating to other countries for work and education.  It is inevitable that people meet their spouses through "non-traditional (whatever that means)" methods.  Second, the divorce rate in Korea is rising.   If you put the first and second facts together, then it is mere common sense that suggests that the children of interracial couples, or couples whose home country may be different from one another, will be subject to extreme controversy.

Individual Stories Are Making Headlines, One Case at a Time
Last week, in The New York Daily News, this dramatic story appeared regarding a child hidden in Korea by the father in Korea.  This is not the only story of its kind.  Earlier in the year, a slightly different case was made public, and attracted a great amount of notice. 

Other countries who have not ratified the Hague Abduction Convention have been widely criticized.  The most obvious example:  Japan has also not ratified the Hague Abduction Convention, despite international criticism.   While Korea allegedly recognizes foreign decrees of law, The New York Daily News article strongly suggests otherwise.  The mother had a decree from a U.S. court, but Korean law enforcement officials were of no help to her as she struggled to locate her child in Korea. 

How Korea Handles These Cases Will Be An Important Litmus Test
One of the central ideas of the Seoul Gyopo Guide is that Korea has an outmoded social and legal system, which is not in step with other areas of its rapid development.  There are undoubtedly countless other stories like the two that have been mentioned:  it is a certainty that many more exist, and have not yet received any publicity.  There has been the suggestion that Korea would eventually adopt the Hague Abduction Convention.  However, that has not been the case, yet.  Even if the Hague Convention is adopted in Korea, it is not clear that Korea will enforce the Hague Convention.  Korea has had an exceptionally poor record with respect to following international norms in many areas that interface with the law.  Perhaps only extreme amounts of negative publicity will force Korea to conform to international standards.  Time will tell, but one thing is almost a certainty: the number of cases will inevitably rise, given the social trends within Korea (more divorces), and the great number of Koreans with experience living outside Korea.  How Korea handles this area will serve as another litmus test in determining whether or not Korea is continuing to join the international community.

Update:  The Seoul Gyopo Guide's timing couldn't be better (luckier).  Today, Japan, who also does not recognize the Hague Convention, was formally criticized by France. Korea is much smaller than Japan in size and population.  While no one knows for sure, criticism of Korea similar to the one lodged against Japan can be expected.  That said, Korea has avoided many criticisms in areas where Japan and Korea are similar.  The jury is still out. 

영어선생 Hall of Shame Entry #8: Banning English Kindergartens Is A New, Dumb Law

The Korean Government Gains an Entry Into the 영어선생 Hall of Shame
The Korean Government has handled educational policy very poorly for a very long time.  That said, it is a very complex problem. On one hand, the fact is that learning English is important.  This fact is unlikely to change anytime soon.  The Seoul Gyopo Guide has stated it on a number of occasions.   On the other hand, Korea is trying to promote a society which promotes social mobility in which the economically challenged still have the opportunity to pursue their dreams.  It has done so clumsily, and yet another example has exhibited itself.

Korea to Ban "English Kindergartens."  
Today, this story appeared in the Korea Herald.  These are selected excerpts from the article.

“According to the law, English is excluded from regular kindergarten curriculum. Some hagwon operators have been providing English programs in the form of regular nursery education, misleading the parents and their children,” a ministry official said.

The bill aims to crack down on hagwon that pretend that they are also licensed kindergartens.

“Since (some kindergartens) are registered as private institutes rather than regular kindergartens, they are not subjected to government regulations on fees,” he said.

The qualification of the facilities was also brought into question. Recently, a mass food poisoning took place in an “English pre-school” in affluent southern Seoul. Investigators said the operators had served outdated foods and admitted that tight hygiene regulations were not applied to hagwon. 

This is a Public Policy Issue, Not A Legal Issue
This law is to try to ban English kindergartens in order to prevent the children of the wealthy from getting a head start.  Anything else is a ruse.  Read the reasons in the article, where the government officials point out that there are problems with hagwons that are representing themselves as kindergartens.  The article continues to mention that there may be health issues at some of these "English Kindergartens."
If any of that were true, the correct remedy would be better enforcement of the existing law, not a new law that bans "English Kindergartens."  If hygiene were the problem, and parents were upset, then the parents have the right to address the matter with the hagwon directly.  There is a Korean term for this which is "치마바람" which is literally the "skirt's wind," but in reality means that mothers will try to get an edge for the well-being of their children.  In other words, the consumers (mothers) could, and would, effectively punish that individual hagwon if there were really a problem. If there were such a thing as consumers' rights in Korea, then this would be effective, and that particular English Kindergarten would be effectively put out of business. 

Either the government is acknowledging that its existing laws are poor and inadequately enforced, or there is something else at the heart of the matter.  The Seoul Gyopo Guide believes that it is the latter:  the Korean Government is trying to change its public policy under the guise of accusing hagwons of doing things that were originally illegal.


Conclusions
This article is far too short.   The Korean Government is having difficulty in trying to level the playing field among the economically privileged and economically challenged.  Its measures to date have been a total failure due to poor planning and poorer execution.  It is another example of two central themes of the Seoul Gyopo Guide.
From previous posts, the Seoul Gyopo Guide has pointed out the following:
It is the notion that the law is subject to change on the whim of parliament due to market pressure or political opinion that is the problem.  Secondly, Korea has deserved its place among a very few privileged nations, but its social and legal structure must match its fully-developed economy.

There are other problems that this law creates, such as the fact that investors, once again, cannot invest in business in Korea with any confidence, because the law changes at the whim of the government that is in power at that point in time.  This is very similar to the bond investors' case, and the KEB debacle.  The law changed on investors after the investment had already been established.  In this respect, Korea compares very unfavorably to Japan (that is a quite an admission from The Lost Seoul indeed).  In any case, the Korean Government, somewhat unsurprisingly, has earned its place in the 영어선생 Hall of Shame.

Please follow me on Twitter, Facebook (TheLost Seoul), or hit the "Like" button just below if you like this article.  Thanks!

China Overtakes Korea in Shipbuilding: A Scary Precedent for "Korea Inc"

China Passes Korea for the Global Lead in Shipbuilding
Yesterday, this brief clip appear on Yonhap's website:  Actually, this is not news to Korea shipbuilders nor steel companies, whose largest customers include the largest Korean shipbuilders (such as Hyundai Heavy).

The notion that Chinese industry will grow, and rapidly, is not new.  Shanghai has replaced Singapore as the world's busiest port.   Joint jentures are widespread between Korea and China.  Autos, electronics, logistics: these are just a few of the Korea's most important industries and China needs precisely this type of technology.  In fact, China's need for this technology is so great, it almost cannot afford for a wider Korean conflict.  On November 27, The Lost Seoul twitted the following, "Just because we don't understand Mandarin doesn't make the Chinese stupid."  The point: China has much a much bigger fish to fry than to let a war between North and South Korea begin.  It would jeopardize the technology transfer critical to China's economic growth. 

It's Not That Simple, Of Course
For Korea, this represents a double-edged sword.  Korea must understand (and it does) that it depends on the Chinese marketplace.  Close geographically, and with many Koreans and Chinese sharing a common, albeit distant heritage, it is an intuitively attractive notion that the two countries should forge close economic ties.  When combined with the historic idea that the Japanese and Chinese people have a long-standing mistrust of one another, China and Korea seem like logical partners in many ways.

China requires Korean technology.  Korea requires the size and breadth of the Chinese marketplace.  How long this symbiotic relationship lasts is an open-ended question.  No one can tell how quickly the Chinese will acquire the technology needed to be self-sufficient.  In other areas, China has surpassed expectations.  For example, China's initial flight of a stealth bomber has caught the U.S. by surprise.

The Shipbuilding Case as a Dangerous Precedent
It appears that Korea will need to extend its technological lead in every industry.  Shipbuilding is, relatively speaking, an industry which does not require exceptionally high levels of technical knowledge.  The largest input, steel, is also a relatively easy to produce, assuming that there is a steady supply of iron which can be refined.  For Posco et al, the challenge is immediate.  Posco and other Korean steel producers will have no choice but to sell to the Chinese and reduce their reliance on Korean shipbuilders.  Korean shipbuilders will need to secure orders from non-Chinese clients.  These are not easy tasks.  Other industries vital to Korea, such as automobile manufacturing, and consumer electronics will face the identical challenges that Korean shipbuilders and steel producers currently face.  So while Korea's leading corporations, such as Hyundai Motors and Samsung Electronics, enjoy leadership roles in their respective industries, the shipbuilding case serves as a dangerous precedent from which important lessons must be learned.
Admittedly, it may be that the Chinese marketplace is so large that it does not matter.  It may be that Korean manufacturers and newly-developed Chinese corporations will be able to peacefully co-exist.  This has not been the case in other similar situations.  Sony and Samsung used to have joint ventures with one another.  Much of those cooperative arrangements have now ended.  It is almost inconceivable that the Chinese do not try the same tactics in the future.  How "Korea Inc" addresses this issue will be a key determinant of its place in the global economic order.

Studying Japanese? Stop Wasting Your Time. Now.

The Seoul Gyopo Guide is meant for many things, and here are the most important.
a.  Inform non-Koreans about brilliant Korea, and the amazing things that have been, are being, and will be accomplished by Korea.
b.  Help native Koreans understand how to adapt to a world outside Korea, which will be necessary in order for Korea to continue its ascent.
c.  Point out how Korea's legal and social structure must evolve to match its economic development.

One bias amongst Koreans that has existed as a result of the oddest combination of animus and envy, combined with convenience, is Koreans' continual study of the Japanese language.  This is a complete waste of time.  The Seoul Gyopo Guide has suggested, almost begged, native Koreans to stop this.  English is much more important, and you can make the case for Mandarin.  The many reasons are summarized here.

More evidence continues, and will continue to flow in steadily. Here is today's evidence from Japan's Kyodo News.

"In a multiple response question asking executive to list negative factors affecting the economy, 75 companies referred to the yen, 58 cited the future course of the U.S. economy, and 31 noted the weakening effects of economic stimulus."

This perfectly coincides with all of the Seoul Gyopo Guide's previous posts regarding the inevitable Japanese decline.  There is a phrase called "The Lost Decade" in Japan.  That is is an untruth.  We are in the third lost decade for Japan.

The Lost Seoul acknowledges that there are similarities between the Japanese and Korean language, which makes Japanese a convenient language to study from an academic perspective.  However, unless you are employed to specifically cater to Japanese tourists, or conduct business with Japanese corporations, it is a fact that Japan is in inevitable decline.  Only a full-out war between North Korea and South Korea can stop that now, and in that case, it wouldn't really matter, would it?

Korea Should Tax Soju to Fund the NPF

The Seoul Gyopo Guide Thanks Everyone for Their Support
First, a huge "thank you" to the readers around the world.  In three short months, many thousands of visitors from every continent, and over 60 countries around the world have visited the Seoul Gyopo Guide.  The Lost Seoul has tried to share its perspective from both a foreigner's and a Korean's point of view.  These points of view have been established by many years of education and practical experience.  The bottom line is that people around the world don't know much about South Korea, and are totally unaware that a city like Seoul has grown into the world's 5th largest metropolis.  While the views of The Lost Seoul are hardly unbiased, they are views which are being offered as fairly as possible.

Korea Needs to Avoid the Japanese and U.S. Example

It is a well-known fact that the National Pension Fund of Korea faces many challenges.  Investment returns have been, overall, more than acceptable.  The National Pension Fund is a well-respected investor around the world.  Nevertheless, the demographic fact is that the average age of a Korean residing in Korea is increasing.  As a result the needs of the elderly will increase through time.  There are other countries around the world where this is an issue.  The U.S. and Japan are two prime examples.  It can easily be said that one of Japan's largest problems is that the aging population is restricting economic growth, and its future indebtedness will only grow, and potentially result in a third "lost decade," when there is limited economic growth, and limited asset price growth.  In the U.S., the Social Security system is in tatters.  While much of this may be the result of the lower tax receipts as a result of a stagnant economy, the underlying fact is this:  in the past there were 8 payors into the Social Security system for every recipient of benefits, and today that number is...3.  Korea is smaller and cannot withstand these shocks.  Various attempts to increase the birth rate have failed, to put it mildly.  In 2009, Korea had the world's lowest birthrate.   Let's put aside the other problems this causes, such as no future demand for real estate, and lack of people to populate the army.  The biggest problem of this low birthrate is that personal income taxes collected by the government will inevitably decline.  That is a certainty unless tax rates increase by an amount to compensate for the loss of payors.

Tax Soju Directly, and Remit the Funds to the National Pension Fund Directly  

Soju is the national alcoholic drink of Korea.  The Seoul Gyopo Guide proposes a 200 KRW tax on every bottle of soju, and that every won is sent to the NPF directly.  A bottle of soju at 7-Eleven or GS24 costs 1,100 KRW.  That is less than USD $1.  Now, we could enter into a whole discussion about how consumer goods are strangely priced in Korea, but don't get me started (a phrase that The Lost Seoul has taught in a previous "Slang of the Day.")  Let's just stop at a couple of examples:  a bottle of Coca-Cola, or orange juice, and a bottle of water are all (or can be) more expensive than a bottle of soju.  Drinking is a well-known problem in Korea.  In fact, there is a even a weblog dedicated to displaying drunk, passed-out Koreans on the street.  A 200KRW tax can then serve two purposes.  First, it can be used to discourage excessive drinking.  Second, it can also be used to finance the impending stress on the National Pension. 

The Potential Objections No Longer Apply

This tax has been proposed in the past.  During the Korea-IMF crisis (known in Korea as IMF 시대), a similar proposal was suggested to fund South Korea's debt to the International Monetary Fund.  At that time, there were many, many makeshift food stands on the road (포장마차) where unemployed men and women would basically sell food in temporary restaurants.  Jinro, the largest soju brand in Korea at the time, went bankrupt (it has now been re-established).  There were complaints that soju was the one of the only respites from the economic turmoil in Korea.  In addition, there was the notion that men and their sons shared soju as a rite of sorts, a tradition between men and their sons which would be jeopardized as a result of this tax.  Well, times have changed, and the prices of essentially every other beverage in Korea has continued to rise, with the exception of soju. If we need a bottle of soju, then KRW200 is a small price to pay.

In the U.S., taxes (and tobacco such as cigarettes) is a called a sin tax.  That is, if you want to drink or smoke, then you are charged for it.  In the U.S. a pack of cigarettes is at least $5.50, or over KRW6000 (and don't ask Manhattanites how much a pack costs).  In Korea, a pack of cigarettes is KRW2500.  A KRW200 tax to fund the NPF is not only justifiable, but it goes to solve an inevitable, long-term problem.

A very important aspect of this proposal is the direct remission of all receipts to the National Pension Fund.  This avoids pointless political wrangling.  Usually, when there are budgetary changes, there is a lot of wasteful, politically-driven debate about where the funds would be used.  A direct deposit to the NPF would avoid all of that.  Politicians that object would be easily identifiable to be those against a proposal that would unequivocally help Korea in the long run.  In other words, if Koreans wanted to know who to vote out of office, this could easily be determined.  While identifying selfish politicians is not the main objective of this proposal, it would be a welcome, needed side effect.   

Things Change, and Korea Must Adjust

The demographic dynamics can change, but the benefits of a tax on every bottle of soju would remain.  The birthrate of Korea could increase.  Koreans may stop drinking (doubtful).  A higher corporate tax rate might result in massive over-funding off the NPF.  The Lost Seoul highly doubts that any of these will occur.  It is potentially the case that a tax on every bottle of soju sold will result in a great deal of revenue to be remitted to the NPF.  That would only result in positive side effects.  For example, if there were a large surplus, then the NPF could increase disbursements to aid aimed at the poor and homeless.  It could invest in infrastructure projects to reduce Korea's dependence on foreign sources of energy.  The elephant in the room is the need to plan for a much, much larger, non tax-paying population, if North and South Korea were suddenly united once again.  In short, a 200KRW tax on every bottle of soju would help solve inevitable long-term issues, and potentially help if certain, sudden events occurred in the short run.

The concept of a "sin tax" is common, and in this case, Korea can learn from other nations.  There are other examples where Korea can follow positive examples to upgrade its practices and laws.  For example, the Seoul Gyopo Guide will begin, in 2011, a new series to focus on Korea's backwardness with respect to international Family Law, as evidenced by Korea's non-participation in the Hague Convention on International Child Abduction.  As Korea's economy advances well into the world's highest echelon, its social and legal structure must meet the responsibilities that accompany that progress.

S. Korea Takes a Step Backwards by Levying a Tax on Foreigners' Bond Holdings

South Korea Needs to Decide:  Developing or Developed? 
The primary challenge facing South Korea is, in fact, an identity crisis of sorts.  Subjugated by larger nations in the past, Korea has fought and won its war versus nationwide poverty.  No longer is South Korea one of the world's poorest nations. No longer is South Korea a war-torn nation whose children had to forgo their education while escaping artillery fire.  Samsung Electronics, LG Electronics, Hyundai Motors, Posco (Pohang Steel):  these are globally-recognized leaders now, all originating from a country of only 50mm people with limited natural resources.  The Seoul Gyopo Guide has been created to foster one central theme:  Korea has deserved its place among a very few privileged nations, but its social and legal structure must match its fully-developed economy.  This is the critical step necessary in order to be fully recognized by the other leaders of the free world. This is not an easy task, and will not happen overnight.


New Proposals for a Tax on Bonds is Totally Wrong and a Huge Step Backwards
When there are steps taken backwards, then they must be pointed out.  Recently, the Korean parliament re-introduced the notion of a levy on fixed-income investments on KRW-denominated bonds.  This is the type of knee-jerk reaction that Korea has often displayed when there is a foreign influx of capital.  The very point of capital movement is the idea that money goes away from unattractive opportunities to attractive opportunities.  In order to be considered a long-term investment opportunity, however, the laws should not change quickly back and forth depending upon market conditions.  Prices of investments should change due to the market conditions, not laws.  In fact, it is not the tax itself which is the problem.  Many other nations have had similar measures in place.  It is the notion that the law is subject to change on the whim of parliament due to market pressure or political opinion that is the problem.
One might counter-argue that the Bank of Korea changes its mind frequently by changing policies.  The answer to this counterargument is that when the Bank of Korea changes interest rates, then that is a market price.  That is the standard global practice, and the Bank of Korea is fulfilling its duties.  However, when the BOK changes the rules or capital inflows, that is a different matter entirely.  The Seoul Gyopo Guide has criticized the BOK when it has announced that it is considering such steps.

Korea's Changing Policies Confuse Long-Term Investors
Korea has been guilty of this practice on the international stage in the past.  One of the Seoul Gyopo Guide's favorite examples was the Lone Star - KEB debacle.  The Korean government approved, and then attempted to nullify a private equity's buyout of the then-paralyzed Korea Exchange Bank.  One interesting point:  Japan had the exact same situation when Ripplewood Holdings, a U.S. private equity firm bought the Long-Term Credit Bank of Japan, and eventually renamed it as Shinsei Bank.  While the case gained a lot of attention, legal barriers were not instantly erected by the Japanese Diet (parliament) to block that takeover.  Therein lies the problem:  Korea's legal structure and its whimsical policies confuses long-term investors, who can be dissuaded from investing in Korea over the long haul.  As a result, foreigners who are interested in investing in Korea have almost no other choice than to invest in liquid markets, where investors can change their mind rapidly.

Even at Home, Koreans Are Confused
Korea has been guilty of this practice in its own domestic market as well.  It is a well-known fact in Korea that the taxation of residential real-estate has fluctuated from administration to administration, and sometimes within a single presidential administration.  In fact, current thoughts are to weaken the real-estate taxation laws in Korea, because the market has been relatively weak compared to other financial assets.  The lagging real estate market is a drag on consumer sentiment, and thus, consumer demand for products is lower than it would otherwise be.  It is another example of how changing policies confuse investors, even Koreans residing inside Korea.  It is no wonder that foreign investors are confused.

Korea Isn't Brazil, nor China
The counterargument against the Seoul Gyopo Guide's claims above could be that other "emerging" economies, like Brazil's or China's also have a similar set of ever-changing rules.  While those countries do have changing rules, it is clear that foreign investors could invest even more if those nations' legal structure were more stable.  In addition, Brazil and China have two natural advantages that South Korea does not enjoy, natural resources (Brazil) and an enormous population (China).  Therefore, those two countries have the luxury of being able to say to the rest of the world, "Take it or leave it."  Korea does not enjoy these luxuries, and as a result, the changing rules in Korea are more likely to result in the choice, "leave it."  By that same token, Korea is no danger of being compared to Russia, who intentionally, selectively didn't pay foreign borrowers on its national debt.  Korea isn't and shouldn't be compared to this almost-unbelievable example.

Other Aspects of Life are Affected by Korea's Legal Structure
Other, lesser known, aspects exist in which Korea does not adhere to international standards of law.  For example, Korea has not adhered to the Hague Convention on Child Abduction in the past.  That has only recently changed.  Eighty-one other nations around the world had signed this agreement before Korea adopted it.  There have been many well-publicized stories regarding this type of controversy in Korea.

Conclusions: Global In Name Only?
Perhaps the most over-used word in Korea is the word "global."  Global this, global that.  Its companies have produced and delivered products around the world.  There is zero doubt about that, and it has occurred at breakneck speed, relatively speaking.  A plot of land (a huge amount of money then) on the large Tehran-no (street name in the Gangnam district of Seoul) at the end of the Korean War in the 1950s which was worth around $10,000 would be worth no less than $300,000,000 today (with building, obviously).  Its laws have not changed at the same pace:  there are justifiable reasons for that.  Nevertheless, the laws and the procedures need to evolve so that Korea can take even further steps to cement its position in the first world.  The "developing world," or "emerging market" labels no longer fit Korea.  Other countries are considering new withholding tax measures as well.   However, those other countries are Indonesia and Thailand.  Those two countries' economic development are not anywhere close to South Korea's.  They are not valid comparisons, and yet even the influential Financial Times mentions South Korea and those two other nations in the same vein.  If the laws are reliable, stable, and can be understood to be so by foreigners, then and only then will Korea be global. The recently-considered tax on foreign holdings of KRW-denominated bonds is a definite step backward towards this end.

The Gift That Keeps on Giving (to Korea): The Strong JPY

This Holiday Season, the Korean Economy's Cheer Comes From...Japan
The Seoul Gyopo Guide has posted several times regarding the Japanese Yen's strength, compared to the Korean Won, and the resulting excellent financial results being enjoyed by Korean corporations (chaebol).

Three months later, these observations have continued, and now results are are being made public, as Korea's unemployment rate has declined to a 6-month low.  Korea's unemployment rate now stands at 3.2%, compared the United States' 9.8%.  Admittedly, underemployment remains high in South Korea, which remains a longer-term, structural problem resulting from a small population, and the fact that manufacturing of many goods has moved abroad in order to take advantage of lower wages in foreign countries, and to avoid foreign countries' scrutiny of Korean trade practices.

In Japan, Economic Conditions Are Not Really Improving
The widely-followed Tankan survey of  large corporations dropped in the most recent poll.  The Japanese government is facing a large number of problems, including high debt levels and an aging population which is stunting personal consumption, despite continued government stimulus programs (The Seoul Gyopo Guide has advised Korean students to stop studying Japanese in favor of Mandarin or English due to the continued Japanese economic malaise).  After two decades, there doesn't seem to be any end in sight.  


The Bank of Korea's Juggling Act
The Bank of Korea (BOK) will face continued pressure to increase interest rates in order to quell domestic inflation.  The BOK has resisted rapid interest rate increases, and this behavior continued in December's monthly meeting.  How long this resistance will continue is unknown.  Korean household debt remains alarmingly high.  Credit-card companies in Korea have already experienced widespread failures within the past decade as a result of unpaid consumer debt.  In addition, the residential real estate market has struggled, even as other risky assets, such as equities and fixed income, have soared in value.  In short, the fact is the Bank of Korea faces a huge conflict on many fronts.

What Can Be Done? 
The Lost Seoul believes that a great deal of these difficulties result from the fact that Korean employees do not benefit from the improved financial results of Korean corporations.  Korean employees are not paid using shares of stock.  Bonuses are given in cash.  In most cases, this is preferred by employees, and for good reason.  However, the issue is that Korean employees are not participating in the financial asset price inflation that is occurring as a result of the strength of the KOSPI.  This would have allowed Korean employees to increase their wealth, increase their job ownership and loyalty, and improve Korean corporation efficiency.  This is not a short-term fix.  This is a structural change to Korean corporate practices which would help the needs of Korean employees and give the Bank of Korea the flexibility to determine the most appropriate policy.  Until structural changes are made, the Bank of Korea will need to continue to juggle conflicting goals with delicacy and deftness.  This holiday season, Japan's continued economic problems are providing Korea's economy with tidings, and providing the Bank of Korea with some needed flexibility.

Political Science Experts Are Frothing at the Mouth: The Korean Conflict Takes Center Stage

Political Science Experts Are Frothing at the Mouth:  The Korean Conflict Takes Center Stage

It has been the opinion of the Seoul Gyopo Guide that war on the Korean peninsula was, is, and will be highly unlikely.  The bottom line is that Korea isn't the appropriate forum for a war, given South Korea's position in the world economy:  it is the U.S.' 7th largest trade partner, and China relies on South Korea for the technology transfer necessary in a large number of industries in order to continue the economic development of the world's most populous nation.  Nevertheless, it is still a fact that anything can happen, and this post examines some of those scenarios.

Is this China's handiwork?
Although this is unlikely, it has been suggested by some that China is behind the North Korean provocations.  If in fact this were the case, then the chance that this is actually a precursor to an all-out military conflict drops to nearly zero.  The reason?  China relies on South Korea in two ways.  First, China is a large exporter of consumer goods to South Korea.  The products range from agricultural products, seafood products, to everyday goods.  Second, Korean companies are enormous investors in China.  If you go to Beijing, you will see that all of the largest conglomerates (e.g. Samsung, LG, SK) have satellite headquarters there.  Hyundai Motors has joint ventures in China, where Chinese companies are "learning" from their Korean counterparts.  In short, the idea that China would support a military conflict would jeopardize, in part, Chinese economic development.  While the idea that the Chinese military is provoking skirmishes throughout the region in order to flex its muscles may be true, the Seoul Gyopo Guide believes that these priorities are subordinate to the importance of economic development.  In November 30th's UK newspapers The Financial Times and The Guardian, it has been reported via Wikileaks that the PRC has been frustrated with North Korea, and not in collaboration with it.

Does the North Korean Military Approve of Kim Jong-Un? 
It is well-known that military conflicts have occurred throughout history when the parties misunderstand the rules of engagement.  Now, rules of engagement means all of the different levels of engagement, i.e. political, economic and military.  One could postulate that as the transition of power in North Korea occurs, that some party, like the North Korean military, could choose to take matters into its own hands, and ignite a military conflict.  This is the one scenario which could actually be realized and must be closely monitored.  Surely, leaders of all parties are aware of global history, and are watching this transition of power carefully.  A great deal of resources have been used by NATO during the Cold War in order to prevent an "accidental war" resulting either from misunderstanding at any level.  The reason?  During the Cuban Missile Crisis and subsequent release of documents from the Kremlin, it is clear to us now that the world was much closer to the brink of a catastrophe than originally thought.  That history does not repeat itself must be the highest priority on the Korean peninsula.

Greater Leverage During Negotiations?  Most Probably.
There were supposed to be new negotiations amongst parties regarding the North Korean nuclear weapons program.   At the same time, a new nuclear facility in North Korea has been revealed.  To make each of these matters worse, there is no sign of respite from the seemingly endless economic decline of North Korea.  The bottom line is that North Korea needs more leverage when sitting at a negotiation table.  With little else to offer, North Korea has had almost no other choice than to use provocation in order to wrench concessions from South Korea and the U.S.  Its economy needs help, and needs it 20 years ago.  Knowing that South Korea has too much to lose should there be a war, North Korea can squeeze aid and other concessions.  As long as the North Korean nuclear program does not include the sale of sensitive nuclear technology to others, then it is political reality that at this point, there is little that can be done to dissuade North Korea from this path, given its dire economic needs.  The North Korean ideological bluster and other manouvers?  Most probably a smokescreen to increase its leverage to receive financial assistance, while maintaining its public stance to the world, and perhaps most importantly, its kool-aid drunken citizens.

But Still, Anything Can Happen...
While the Seoul Gyopo Guide continues to dismiss the ideas that war is anything other than a very low-probability event, it is true that anything can happen.  It can happen by error.  It can happen by miscalculation.  It can happen even if the best intentions exist.  So unfortunately, all parties will need to use financial and political resources that could be otherwise deployed.  Given the economic and social problems that originally existed, and remain, that may be the largest price being paid at the moment (aside from the 2 South Koreans that were part of the South Korean Navy, and the innocents on Yeonpyong Island).  The Seoul Gyopo Guide mourns their senseless loss.

일본어 왜 공부하고 싶습니까? 일본어가 상관없을 것 같습니다.

Don't waste your time (and money) in learning Japanese (일본어).  Japan is in PERMANENT decline.

Japanese is easy for native Koreans to learn.  You have heard from your friends, or you know it for yourself, that native Koreans can learn competent Japanese within one year.  That is not a good reason to learn Japanese.   Japan is in PERMANENT decline.  Its influence in the world has peaked long ago.  Here is why.

1.  Japan's population is old.  It is a well-known fact that the Japanese live longer than the global average.  Some say it is due to the large amount of seafood consumed there.  It doesn't really matter why.  The point is that the average age of the Japanese population is far greater than other countries in the Asia, and the world.  Why does this matter?  Young people drive innovation, old people do not.  Companies target younger buyers for a reason:  they spend more money than older people.  One very good reason that Korea has caught up to, and in many cases, surpassed Japanese consumer electronic companies?  The younger, more demanding population of Korea has made LG, Samsung, and others to continue to make changes to consumer products continuously.  Think about Korea for a moment.  When there is a new product that falls behind, does it ever catch up?  Look at LG Electronics now in 휴대폰.  Remember the Chocolate?  It is now long forgotten due to the iPhone and Samsung android smartphones.  10 years ago, Panasonic, Toshiba, and Hitachi were signifcant consumer electronics brands in the U.S.  Now?  All but gone, and surpassed by LG and Samsung TVs.

2.  Japan is debt-ridden.  The size of the governmental debt is enormous.  One reason for the economic decline of Japan, and the failure of the Japanese government to stimulate the economy is because it cannot afford it.  Coupled with a declining population, who will be able to repay this debt?  There are fewer taxpayers to pay, and less profitable Japanese companies to pay corporate taxes as well.

3.  China, China, China.  Koreans are aware that China and Japan have a long history of animosity.  More than that, China's enormous population and natural resource needs will dominate the attention of people and companies on a global basis.  In the U.S., there is almost no mention of Japan as a target market.  China, and to a lesser extent, India are far more important to the future of corporations.

This is only a partial list.  Japanese is, no doubt, easier for native Koreans to learn.  Nevertheless, English is, and will continue to be, the universally accept language of business.  Since Korea must focus on business on a global basis, English is far more important.  Chinese is of course important due to the fact that it is close to Korea, and the world's most populous nation.    Japan, and Japanese, are in decline, and will continue to be for the forseeable future.  So, unless you are working at a job that is focused on Japanese tourists or tourism to Japan, studying Japanese will continue to be less important to Koreans.

The Fed Had A Shot to Get it Right By Mimicking Korea: Facing a Total Economic Collapse, KAMCO Saved Korea

Last week, this article appeared in the New York Times/Reuters Global Business Section which was suggesting that China follow Korea's path in order to increase the per capita GDP.  It was quite complimentary regarding Korea's reaction to the economic crisis of 1997-1998..  It does point out that the linkages among the different subsidiaries within a single chaebol were indeed broken, and that led to a path where a sustained economic recovery could ensue.

Here is the quote:
South Korea, though, after nearly defaulting on its debts at the end of 1997, pulled itself together and resumed its march up the value chain.
The key reason is that Seoul embarked on far-reaching market changes. In particular, the government reduced the power of the chaebol, the sprawling debt-heavy conglomerates whose links to the state created the impression that they were too big to fail.

Close, but not quite.
There is no doubt that the tangled web of the related companies of the large conglomerates was larely unwoven.  However, the conclusion that the government reduced the power of the chaebol isn't quite accurate.  There are a number of reasons that this is an inadequate description of what actually occurred.

First, and by far the most important, fact is that bad assets, whose value was only worth a few percentage points of reported book value, were cordoned off into the Korea Asset Management Corporation.  This included assets such as real estate, failed banks, and distressed companies.  Those assets were then correctly valued by the marketplace (although in the Goldstar/KEB case, this has been a very long, drawn-out process), and sold in a controlled fashion.  The analogy to KAMCO was the "good bank/bad bank" proposal that surfaced, and ultimately rejected, in the US during 2008. 

Second, the untangling of the cross-holdings of the debt issued by the related companies of the chaebol was absolutely key.  It wasn't that the influence of the chaebol was diminished per se.  It was that the financial viability of performing assets was more indentifiable by the market and that capital naturally flowed to the most desirable, and now relatively tangle-free, companies.  The best example of this was the Hyundai Group.  Perhaps more important than Hyundai Auto, which was already well-known to the world at that time, was the fact that Hyundai Heavy, the largest Korean shipbuilder had an extremely complicated financial relationship with Hyundai Group.  As a result, an investor of any sort, whether a lender or a shareholder, didn't quite know to where capital was allocated.  Once the tangled web was unwoven, then capital correctly chose the "winners" and the market let the "losers" fail.  Now, it did so with obvious governmental support at that time, but it did so nonetheless.

Third, the effect on Korean banks was that they too could report more accurately their exposure to specific Korean entities. This cannot be understated.  In the Korean language, there is a saying which is loosely translated to "money turning around makes more money."  In English we would say "you need to spend money to make money," or something like that.  The cleansing of the balance sheets of Korean banks made it possible for lending to resume, and importantly, to resume to entities without the spectre of a debt and stock cross-holding nightmare. 

Fourth, the article seems to minimize the dominance of the largest Korean chaebol.  Perhaps that is the view of a foreigner who has not spent a long time in Korea with Korean natives.  There have been, of course, gradual changes.  Nevertheless, the dominance of the largest Chaebol remains.  A viable explanation for the lack of a Korean "Steve Jobs" leader is that even if a pioneer had a vision, and a product that reflected that vision, that the business execution of that vision is made almost impossible because a chaebol would either buy that business before it grew into its own individual entity, or a chaebol would effectively crowd out the potential new competitor due to the dominant links to the retail chain, or that the visionary would thrown in the towel under the weight of potential competition and sell his/her idea too early to a large chaebol group.  Currently, a very compelling argument can be made that the underemployment of the very highly-educated Korean college graduate population is the result of lack of entrepreneurship opportunities which are effectively squealched by the chaebol.  Instead, Korean college graduates, faced with increased competition for few cherished jobs at the chaebol, instead opt for yet another degree to try to prove their worth to these dominant corporations.  Whether that is intentional or not is not the issue:  that it occurs is a fact.  That creates a viscious circle where the next student wants to obtain yet another, more advanced degree.  The result:  enormous structural underemployment. 

In short, yes, the NYT is accurate in that there have been large reforms in Korea since 1997-1998.  However, the nature of those changes, and how they supported the Korean economic revival, are slightly off the mark.  When history is written on Japan (over the past two decades), China, and the US during this period immediately following the financial crisis of 2007-2008, The Lost Seoul believes that sub-optimal growth occuring is because an opportunity was missed.  Korea seized that opportunity by cleaning its own balance sheets as much as they could have been, and creating KAMCO.  Then and only then could the improved global competitiveness of Korean products be fully recognized. 

The Lost Seoul

Hyundai Motors and Kia Motors are Major Beneficiaries of the Strong Japanese Yen

Readers of the Seoul Gyopo Guide have known what has been coming out in the press at an increasingly rapid rate:  the rise in the JPY is hurting the most important Japanese industries.  Right on cue, the Japanese auto manufacturers are weighing in on the strong Yen:

Nissan:  http://www.cnbc.com/id/39841041
Toyota:  http://www.cnbc.com/id/39825815 and http://www.cnbc.com/id/39859591/
Suzuki: http://www.asianewsnet.net/home/news.php?id=15122&sec=2
Honda:  http://www.asianewsnet.net/home/news.php?id=15183&sec=2

Of course, the world usually looks at the US dollar as the reference point.  Again, the thesis here by The Lost Seoul has been consistent:  Hyundai and Kia stand to gain as a result of the strong Yen.  Exactly as predicted here on the original post, Kia reported record results just yesterday and Hyundai also followed suit.

Hyundai Motors, in particular, has been benefitting.  The Kelley Blue Book has reported that Hyundai is the brand in which interest has increased the most.  As many know, Hyundai's 100,000/10 year guarantee, as well as the Hyundai Assurance plan, which allows purchasers to give the car back to Hyundai should the driver lose his/her job, has made Hyundai famous.

And while Korea has stayed "under the radar" during the currency skirmish occuring now, the Korean automakers will continue to take market share in the international marketplace.  Low interest rates are making things even worse, because now the Japanese have no flexibility to compete on price.  Unless cars begin to fly out of showrooms, this will not change for the foreseeable future. 

This story is nowhere near finished.  There are no easy answers for the Japanese Yen, unless there is a coordinated effort by the largest nations to simultaneously sell the Yen.  Perhaps this will occur naturally, but at this point, it does not seem very likely.  While it may be suggested that this is a process that should happen naturally, the political reality is that Japan's internal political unease will most likely continue to force the BOJ to continue alone, until there is a coordinated effort, which will need to include the Chinese.

www.twitter.com/thelostseoul

Relentless: Japanese Car Manufacturers are Complaining about the Strong Yen

Readers of the Seoul Gyopo Guide have known what has been coming out in the press at an increasingly rapid rate:  the rise in the JPY is hurting the most important Japanese industries.  Right on cue, the Japanese auto manufacturers are weighing in on the strong Yen:

Nissan:  http://www.cnbc.com/id/39841041
Toyota:  http://www.cnbc.com/id/39825815 and http://www.cnbc.com/id/39859591/
Suzuki: http://www.asianewsnet.net/home/news.php?id=15122&sec=2
Honda:  http://www.asianewsnet.net/home/news.php?id=15183&sec=2

Of course, the world usually looks at the US dollar as the reference point.  Again, the thesis here by The Lost Seoul has been consistent:  Hyundai and Kia stand to gain as a result of the strong Yen.  Exactly as predicted here on the original post, Kia reported record results just yesterday and Hyundai also followed suit.

Hyundai Motors, in particular, has been benefitting.  The Kelley Blue Book has reported that Hyundai is the brand in which interest has increased the most.  As many know, Hyundai's 100,000/10 year guarantee, as well as the Hyundai Assurance plan, which allows purchasers to give the car back to Hyundai should the driver lose his/her job, has made Hyundai famous.

And while Korea has stayed "under the radar" during the currency skirmish occuring now, the Korean automakers will continue to take market share in the international marketplace.  Low interest rates are making things even worse, because now the Japanese have no flexibility to compete on price.  Unless cars begin to fly out of showrooms, this will not change for the foreseeable future. 

This story is nowhere near finished.  There are no easy answers for the Japanese Yen, unless there is a coordinated effort by the largest nations to simultaneously sell the Yen.  Perhaps this will occur naturally, but at this point, it does not seem very likely.  While it may be suggested that this is a process that should happen naturally, the political reality is that Japan's internal political unease will most likely continue to force the BOJ to continue alone, until there is a coordinated effort, which will need to include the Chinese.

www.twitter.com/thelostseoul

Korea's Reason for Feasting This Year: The Yen's Strength

Chuseok is here and Korea is Feasting...because of the Japanese Yen
Well, it is Chuseok (추석) season, which begins tomorrow, September 21st, and lasts for 3 days.  This year, Korea's economy has to be especially thankful for one thing:  the Japanese Yen's incredible strength.  There is little doubt that Korea has feasted on the decline of Japan's influence on the world. 

Two years ago, the JPY/KRW exchange rate:  10
Now:  13.40

To those of you that don't know, it means the following: a Japanese product is now 34% more expensive, or less profitable than the same product made in Korea.  Well, what types of products might those be?  Try automobiles, ships, steel, and electronics.  Guess what Hyundai Motor, Hyundai Heavy, POSCO, and Samsung Electronics sell?  Who are their main competitors on a global basis?  Japanese in every case.  So, there is no doubt about why Japanese companies are bitterly complaining to the Bank of Japan.  For the moment, it has been effective:  the JPY/KRW exchange rate was over 14.25 just a week ago.

What does this mean for Korea going forward?
It is rare for the world to compliment both the corporate sector and the government, but this may in fact be true in Korea's case.  The government has been slow to reduce fiscal stimulus measures, and the Bank of Korea has responded to inflationary pressures by slowing increasing interest rates.  So while the demand for imports into the U.S. and China has waned, the JPY/KRW rate has kept Korean-made products very competitive, and now, as we all know, Korean-made products are, as a whole, on par if not superior to their Japanese-made counterparts. 

Derivatives the ugly word are most likely a partial solution.
Derivatives in Korea have left particularly ugly scars.  During the Asian currency crisis, Korean securities firms were heavily invested in speculative, leveraged investments linked to the Thai Baht.  During the Financial Crisis of 2007, Korean companies were found to have owned KIKO (Knock-In, Knock-Out) derivatives on the Japanese Yen. 
In today's case, it is the writer's view that Korean corporations need to get hedged, at least in part.  There is no way to tell, given the relatively weak global economic recovery, whether or not demand for Korean-made products will continue, and more importantly, how much of this demand is due simply due to the appreciation of the Yen.  Korean companies need some protection in case the Yen declines, and Korean-made products become relatively expensive and do not sell.
Notably, the carry trade would suggest that the Yen may in fact decline at the time that there is more optimism in financial markets as a whole.  That is what has confounded many experts in the market.  Equity markets globally are not far from their highs, and yet the Japanese Yen is near its greatest levels in 15 years. 
What does this means?  Either Korean-made products will continue to grow, and the Yen may or may not appreciate.  Or Korean-made products' sales will decline, as a result of either a global economic slowdown, or a depreciating Yen.  The worst case would be if the Yen depreciates, and Korean-made products' sales decline by more than would be anticipated due to a global economic slowdown.  It is this case that needs to be hedged in part.  

The days of Korean products needing to be cheaper in the global marketplace no longer exists.  In every major industry, Korea's products are competitive with other nations', at nearly every level.  As a result, Korea's companies shouldn't take extra risk by hoping that the JPY/KRW continues to be at such high levels.  Korean companies need to buy some puts on the JPY/KRW (that appreciate when the JPY/KRW level declines).  They should buy a partial hedge, which will cost money, but will provide protection against unfavorable moves.

No one knows exactly what will happen, but one thing is for certain:  the global economy is, and will contiune to have strange relationships due to the aftermath of the Financial Crisis.  Korean companies should take advantage of the sharp increase in JPY/KRW, with the knowledge that it, over the multiple-year horizon, will most likely not last.