1. Post-Crisis Slowdown in Global Growth Potential & Its Implications
Advanced countries have started to raise concerns that post-crisis economic recessions can bring about not just a temporary decline in investment and consumption, but also a mid- and long-term slowdown in growth potential. The IMF and the OECD explain that the advanced economies have yet to see their growth rates put back on track partly because the potential growth rates were already trending down before the crisis. Against this backdrop, a theory called “secular stagnation” which says that traditional monetary policies are not enough to turn around a sluggish economy as the current economic recessions around the world reflect a long-term decline in growth potential is gaining attention. In other words, to address a recession triggered by a supply-side reason, it is essential to implement a long-term solution such as boosting productivity and encouraging economic participation by women, rather than relying upon traditional monetary policies or other measures to expand aggregate demand.
For greater productivity, Korea should also provide support for those service sectors with low value added and SMEs too stretched for R&D investments while promoting networking for efficiency. It also needs to encourage more women to participate in economic activities and give births by expanding investment in child care facilities, reducing overtime work and implementing flexible working hours more widely. It is also important to plan investments in material and human capital ahead of the potential reunification of the Korean Peninsula and implement the plan step by step when the time comes.

2. Increased FX Volatility and Monetary Policies of Major Economies
Entering 2015, the world’s major economies and emerging markets witnessed their currencies demonstrate the greatest volatility against the US dollar since 2000, following the Q1 2002–Q1 2004 period when the dollar was weak as well as the global financial crisis and the sovereign debt crisis in Europe.
The increased volatility in exchange rates around the world is attributable to the following factors: 1) more and more central banks have cut their policy rates depending on their economic needs without coordinating with other countries and 2) large economies with key currencies have showed opposite monetary policies. Whereas the US and the UK are cautiously considering austerity measures, the European Central Bank and Japan have expanded quantitative easing, resulting in a greater FX volatility.
Amid the growing FX volatility in the international markets, Korea should closely monitor the trend of the Korean won and analyze in detail how these bold monetary policies taken by major advanced economies would affect the international capital flow and financial markets as well as the Korean economy. As the conflicting monetary policies of major economies that hold key currencies can cause a protracted instability in the international financial markets, Korea should also be prepared to tackle that instability with flexibility.  

3. Recent Developments on Consumption Tax Hike in Japan
Japan’s growing spending on social welfare caused by the rapid aging and low birth rates since the mid-2000’s sparked an active discussion on a consumption tax rate. While reforming its social welfare scheme in 2012, the Japanese government also passed legislation for a phased increase in consumption tax from 5% all the way to 10% by October 2015 to finance the reform. After raising it to 8% in April 2014 as planned, however, the Abe administration announced a decision in November 2014 to delay the target date for a 10% consumption tax to April 2017, from the originally planned October 2015, citing a decline in real GDP and a drop in consumption.
Under the legislation governing the consumption tax increase, all revenues from this hike are earmarked for welfare spending. As a measure to mitigate the regressive effect of the consumption tax hike, the Japanese government also installed a committee in February 2015 to introduce a reduced tax rate for certain items subject to consumption tax, following the examples of many European countries. The committee has begun to review various relevant factors with an aim to implement the scheme in 2017.

You Seungsun, Choi Cheun-gyu, Chang Yoonjeong