Korea should not waste golden time before U.S. rate hike

The United States has kept its key interest rates for the sixth consecutive times since a rate hike in December 2015. Federal Reserve Chair Janet Yellen decided to leave the key interest rates unchanged at 0.25-0.50 percent, noting that most people thought it would be appropriate to have a Fed rate increase this year. As she announced a rate hike at this year’s last Fed meeting in mid-December after the U.S. presidential election is over, it is likely that the U.S. will withdraw dollars it has supplied since the 2008 global financial crisis.

Unlike the U.S., the Bank of Japan said it is committed to quantitative easing until inflation exceeds 2 percent. Rather than resorting to indiscriminate quantitative easing of purchasing treasury bonds, however, the Japanese central bank is adopting a new method of keeping long-term bond yields at a zero rate. The new policy is so uncertain that even experts are not sure about the effects. As the U.S. and Japan go in different ways in their monetary policies, there is a greater risk of global funds rushing to Japan and then suddenly shifts to the U.S. It is possible that during the process, emerging markets including South Korea will face situations in which their currencies fluctuate wildly.

A U.S. rate hike has more negative sides than positive. Even if a weaker Korean won creates room for increased exports, massive exodus of foreign capital from domestic stock markets could cause a chaos in the local financial markets, nullifying the effects of increased overseas shipments. If the Korean economy synchronizes with other emerging markets and face capital flights and currency deval‎uations simultaneously, it could end up in a situation in which its foreign currency reserves of more than 370 billion U.S. dollars are not sufficient. Household debts amounting to 1,300 trillion won (1.2 trillion dollars) are the detonator of a debt time bomb. Just a quarter point increase in interest rates would add more than 2 trillion won (1.8 billion dollars) in interest payment burdens.

President Park Geun-hye on Thursday asked her administration to maintain a readiness posture for any change of situation. However, it is questionable whether the government can take pre-emptive measures just by holding routine meetings. The 80 days remaining until the Fed’s December meeting is the last golden time for Seoul in the face of a global financial upheaval. The Korean government and Bank of Korea should check all macroeconomic measures possible, including bad debt management and macroeconomic soundness regulation, to prepare for risks from the U.S. Korea cannot afford to waste the time for strengthening its economic fundamentals while preparing for a financial upheaval.