Two different ways of responding to a crisis: how South Korea outgrew Japan

1. Asia as a whole was struck by crisis in the second half of the 1990s

Korea and Japan were both negatively impacted, but their post-crisis paths suggest different policy responses

2. Fiscal discipline and continued investment in long-term industrialisation explain South Korea's stronger growth vs. Japan

In response to the crisis, Japan redirected its fiscal policy towards short-term stimulus.

This led to a vicious cycle of rising fiscal deficits and debt, which constrained Japan's ability to invest in the long-term.

Indeed, we've seen that Japan's growth has been weak after the crisis.

On the other hand, South Korea embraced fiscal discipline, reorientating its economy back on track with a focus on long-term investment.

3. This helped South Korea remain competitive in global markets and sustain its export-led growth model

South Korea's continued high investment rate allowed it to stay abreast of technological advancements, just as the world stepped into the digital age.

While still a major global player, Japan failed to adapt as quickly because of a lack of fiscal discipline and a focus on short-term stimulus. This has led to a gradual loss in competitiveness.

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