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(EDITORIAL from Korea Times on April 1)

All News 06:59 April 01, 2016

Monetary easing dispute
Time to beef up fundamentals through reform

Controversy over a Korean version of quantitative easing (QE) is heating up. On Tuesday, Kang Bong-kyun, co-head of the ruling Saenuri Party's campaign committee, made the monetary easing pledge, saying, "Monetary policy must be conducted in such a way as to provide money to where the credit crunch is serious."

Kang, who was finance minister under the liberal Kim Dae-jung administration, claimed that the Bank of Korea should buy commercial banks' mortgage-backed securities and bonds issued by the Korea Development Bank. These measures would help ease household debt and corporate restructuring woes, he said, adding that they must be carried out right after the April 13 general elections.

Quantitative easing is a monetary policy used by central banks to stimulate the economy through unlimited bond purchases. The U.S., Japan and the European Union have adopted the policy since the global financial crisis in 2008.

The U.S. move had a positive effect, but Japan and the EU suffered failures. The Japanese economy has gone downhill after picking up for a while, and the EU is facing a greater risk of deflation.

Bank of Korea Governor Lee Ju-yeol reacted negatively to the governing party's proposal, saying Korea's situation was different from that in advanced countries that had adopted quantitative easing and even negative key interest rates.

Strategy and Finance Minister Yoo Il-ho declined to comment, indicating that he was not positive about Kang's idea.

The need for bolder and preemptive measures can be understood in the current circumstances where even lowering interest rates rarely stimulates investment and economic recovery is remote. Political parties cannot help but feel tempted to make sugar-coated pledges that can appeal to voters, especially ahead of the election.

But the quantitative easing scheme, as suggested by Kang, can be a risky option for a country such as Korea, which has a small-scale open economy. First and foremost, there is a strong possibility that the massive supply of liquidity into the financial system might prompt sudden currency devaluation, resulting in rapid capital outflow.

In fact, negative interest rates or quantitative easing seems to be a policy that can be adopted only by reserve currency countries like the U.S. Korea's adoption of such a radical policy is not appropriate, given that Korea is easily swayed by small currency fluctuations.

The timing is not good, either. Quantitative easing is a very important issue that can have a tremendous impact on our economy. So it is not proper for a political party to make such an election pledge abruptly. Many critics say there is no need for Korea to introduce such a policy, noting that its key rate is 1.5 percent.

The ruling party's suggestion is all the more misguided, considering that it could infringe on the independence of the central bank, which holds absolute authority over monetary policy.

At this juncture, it is doubtful if pumping up liquidity would be effective in rejuvenating the moribund economy. After all, it is time to get back to basics: beefing up fundamentals through radical structural reform.

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