The Bank of Korea's decision on Thursday to hold interest rates steady raised nary an eyebrow among investors, who had expected the central bank's inaction. But one man in Asia might want to look more closely at developments in the world's 13th-largest economy: Japanese Prime Minister Shinzo Abe.
The Bank of Korea's monetary policy committee noted that the domestic economy is gaining strength. The 3.9% year-on-year growth rate for the last three months of 2013 was the highest in three years. A slight spike in the unemployment rate in January to 3.2% resulted mainly from an increasing number of Koreans entering the labor force as conditions have improved, and those new workers appear to be finding jobs. While seasonal factors such as cold weather and the lunar new year holiday depressed exports slightly in January, that number also is expected to stay strong for the rest of 2014.
Notably, Korea has maintained its economic resilience even as the Korean won has appreciated by 9% against the greenback since early 2012. This belies a central plank of Mr. Abe's agenda for Japan—that currency devaluation is critical for export competitiveness. Korean companies have held their own against their Japanese competitors over the past year despite Mr. Abe's dramatic weakening of the yen.
Among other factors, Korean companies have competed globally by improving the quality of their products. Note that Apple's leading challenger at the moment is Samsung, not a Japanese company. When it comes to the sophisticated products manufactured by developed economies, market share is more about innovation than price.
Mr. Abe could also mark the ways Korea benefits from a free-trade push Seoul started several years ago. Trade agreements with the European Union and the U.S. are now in effect, opening formerly sheltered domestic industries to competition and investment. There are no hard data yet, but these deals are widely expected to stimulate investment in those industries, where productivity currently lags developed economies by as much as one-third.
Recent developments in Korea provide a marked contrast to Japan. Seoul has been quicker and more eager than Tokyo to embrace free trade; more willing in recent years to tolerate a stronger currency; and more committed to domestic reforms, especially in paring back old industrial policies and cutting red tape on service industries.
Mr. Abe scores well on the trade front, having signed Japan up for negotiations toward a multilateral Trans-Pacific Partnership deal. But otherwise his revival plan consists mainly of a weak yen, old-style fiscal stimulus and nudges to steer corporate investment in new ways rather than freeing the private economy.
Korea still has much work to do in reforming its economy, as officials in Seoul acknowledge, but they can draw encouragement and build political support from the successes they have already earned. Korea industrialized largely by following the export-led model Japan set in the post-war period. Perhaps it's time for the erstwhile teacher to learn a lesson or two from its former student.