It’s easy to think that South Korea doesn’t stand a chance of ever surpassing Japan. After all, the Korean economy is now barely over 1/4th its size. That’s despite strong growth over the past few decades.
Japan was Asia’s most important regional power for centuries – at least until China caught up in 2010. However, Korea is a slightly poorer country and has just 50 million people compared to 120 million in Japan.
You’d be correct in saying Korea probably won’t catch up to its larger, more populous neighbor in the short to mid-term. But there are several reasons why South Korea could actually outgrow Japan within your lifetime.
It’s crucial to consider a nation’s long-term growth prospects before investing abroad. A rising Korea and declining Japan has wider implications for anyone investing in Asia.
Strong, Stable Economic Growth
Did you even know about Samsung and Hyundai back in the 1990s?
Chances are either you didn’t, or if you did, you considered them inferior junk brands like everyone else. There was a time not long ago when Korean-manufactured products had similar reputations to Chinese goods today.
Things can change quickly, and the Korean economy boomed since the 1970s. Samsung now competes with Apple while Hyundai competes with Toyota.
Nowadays, Korea is a developed county (regardless of what some emerging market ETFs invest in). It’s growing at a respectable rate of around 3% despite their status as a wealthy country.
Compare all that to Japan’s recent history. After going through its own expansion phase in the 1970s and 1980s, GDP growth declined to around 1% in the 1990s.
People call it Japan’s “lost decade”, but it’s really more like the lost three decades. That’s because Japan’s growth stayed at around 1% until this very day. Meanwhile, debt levels and inflation have spiraled out of control.
The Korean economy is simply stronger and has a more consistent track record of growth. Because of this, South Korea will soon be richer than Japan on a per-capita basis. That’s despite having to spend the past few decades catching up.
A long history of growth is good. But how do I know Korea won’t spiral into a downward trend like Japan did? Likewise, why won’t the Japanese economy speed up once more?
Demographics lead to the answer. Japan suffers from one of the oldest populations in the world – second only to Monaco, in fact.
The nation’s elderly population necessitates a welfare state. More people need pensions and healthcare, less people are of working age, while Japan is becoming less productive as a result. These trends will only continue to get worse.
Why will they get worse? Because Japan’s aging population, combined with a low birth rate, will lead to severe population decline for the foreseeable future. This troubling trend will continue until the end of the 21st century, probably long after we’re all dead.
South Korea’s situation isn’t anywhere near as dire. Their population will rise until around 2040 before declining at a less significant rate.
North Korea: The Wildcard
Believe it or not, North Korea might be the deciding factor in whether the Korean economy can overtake Japan’s in the long-term.
It’s certainly not guaranteed. But a successful reunification of the Korean peninsula could, at least potentially, lead to a higher population and stronger economic growth.
North Korea’s population now stands at around 25 million. Combined with the South’s 50 million, a unified and more populous Korean economy could easily compete with Japan’s on a national level.
Reunification would obviously be rough. It would involve a brutal war, followed by a lengthy process of integrating millions of brainwashed North Koreans into a modern society.
The end result might be a source of cheap labor and natural resources though. A unified Korea stands a real chance of not only being more populous than Japan, but also richer.
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