If any top Asian central bank is having a dreadful 2025, it’s South Korea’s.
Between slowing growth, surging household debt, Chinese deflation and Donald Trump’s fast-intensifying trade war, Bank of Korea Governor Rhee Chang-yong could be excused for wishing someone else was in his shoes.
Making matters worse is a grinding political crisis that’s making Rhee the de facto leader of the nation of 51 million people.
The political vacuum was caused by President Yoon Suk Yeol’s impeachment on December 14, a parliamentary response to his fleeting imposition of martial law earlier that month.
As South Korea’s Supreme Court mulls Yoon’s formal removal from power, Asia’s fourth-biggest economy is in limbo at the worst imaginable moment.
Global investors have had a near-impossible time discerning who’s really at the controls in Seoul, who’s keeping the economy on track and whether the “lost decade” many investors feared for South Korea is now a 100% certainty.
The state of affairs has international credit rating agencies at a loss – and, for now, pulling their punches. As Fitch Ratings analyst Jeremy Zook puts it:
“While Korea has sufficient external finance and fiscal buffers to manage a period of high political volatility, sustained political gridlock could erode policymaking effectiveness, economic outcomes, and fiscal management over time.”
Investors are being less deferential as capital exits Kospi index stocks and the won currency. In the confusion and disorientation, Seoul is confirming, day after day, why global funds long assigned a “Korea discount” to the place.
Perhaps most alarming of all is how Korea may be dropping the ball on its tech edge. There are growing signs of flagging tech competitiveness in a sector that’s outshone all others for a decade.
Korea is feeling the “China effect” from both ends. A slump in mainland demand for chips comes just as President Xi Jinping’s “Made in 2025” tech push is gaining real traction, and Chinese overcapacity is flooding Asia with cheap but innovative goods.
It hardly helps that US President Donald Trump’s tariffs and import curbs are generating fresh headwinds. Supply-chain uncertainty, too, as import substitution dynamics have Korea Inc unclear where Washington’s red lines on trade lie.
All this is putting central-banker-turned-de-facto-Korean-leader Rhee to the test as few peers, if any, will ever know.
Sure, Bank of Japan Governor Kazuo Ueda confronts his own impossible task in 2025. Continuing to hike rates to curb inflation could tip the world’s third-biggest economy into recession. And just four months ahead of national elections at a moment of plunging support for Prime Minister Shigeru Ishiba’s ruling Liberal Democratic Party.
As such, “we retain our view that the bank will remain on hold in the near term,” says Takeshi Yamaguchi, chief Japan economist at Morgan Stanley MUFG.
In Washington, Federal Reserve Chairman Jerome Powell faces his own Trumpian dilemma. With inflation re-heating and tariffs sure to hike prices further, it’s hard to see the Fed bowing to Trump’s demands for lower rates.
“You have inflation stickiness on the one hand,” says Esther George, former president of the Federal Reserve’s Kansas City branch. “At the same time, you’re trying to look at what impact could this have on the job market, if growth begins to pull back. So it is a tough scenario for them for sure.” That, George notes, “is the tangled web they’re in.”
Some worry the US is courting stagflation as Trump, through extreme political volatility, risks sabotaging the biggest economy. With US unemployment at just 4.1% and Trump’s Republicans angling for tax cuts, returning to the Fed’s 2% inflation target might require tighter policy. That may have Trump trying to fire Powell — again.
In Seoul, though, Rhee really is the glue holding a large, trade-reliant economy together.
On February 25, the BOK cut rates by 25 basis points to 2.75% while significantly lowering its GDP forecasts. Most board members agreed that Korea is losing momentum faster than expected amid sluggish domestic spending and global headwinds.
“Domestic economy is getting more sluggish than we had expected earlier and downside risks are growing from US tariff policies,” one board member who voted to cut rates said, according to the minutes of the BOK meeting.
At the same time, further rate cuts could be counterproductive. For example, it might encourage households to up borrowing activity.
South Korea’s household debt-to-gross domestic product ratio was the second highest among major nations at the end of 2024 at 91.7%. That’s the second highest among 38 Organization for Economic Cooperation and Development (OECD) nations.
Any step lower in BOK rates risks incentivizing households to increase debt, adding to Korea’s biggest imbalances.
Meanwhile, Yoon’s declaration of martial law in December has backfired spectacularly on the nation. Ian Bremmer, president of Eurasia Group, a risk consultancy, called it “Korea’s most bizarre and explosive political crisis in decades.”
Yet even before then, Yoon was remarkably unpopular with voters for, among other things, failing to level playing fields, address near-record household debt, increase productivity, empower women or improve corporate governance.
The 938 days between Yook taking office in May 2023 and his December 3 blunder were hardly a reformist whirlwind. That left the BOK squarely in the driver’s seat.
More and more, the central bank has taken the lead in managing what, until perhaps very recently, was one of the globe’s most open and dynamic major economies.
Rhee has been calling for economic reinforcements, of course, urging the government to find a way to boost fiscal stimulus.
“A supplementary budget is also key to addressing downside growth risks,” says Ashok Bhundia, an economist at the Institute of International Finance. “If the government fails to pass a supplementary budget, then a deeper rate-cutting cycle may be needed.”
Unfortunately, there were signs that Yoon’s People Power Party was pivoting to raising Korea’s tech game. On December 2, a day before Yoon blew up his legacy and Korea’s global standing, then-Finance Minister Choi Sang-mok said, “The next six months will be the golden time that will decide the fate of our industries.”
Choi, who later replaced Yoon as premier, added that “given the current challenges, including global economic shifts under the incoming US administration, competition from emerging countries and the rapid reorganization of global supply chains, the role of the government must evolve from a supporter to a player working alongside businesses.”
At the time, investors hoped Seoul was serious about rolling out a package of support measures for the semiconductor industry. The timing was unmistakable: Home to leading memory chipmakers Samsung Electronics and SK Hynix, South Korea faces greater uncertainty over Trump’s tariff plans than most peers.
Lee Kyung-mook, co-author of “The Samsung Way”, notes that increasing Seoul’s commitment to research and development is “essential” given how South Korea is “sandwiched between more developed nations” and China, which is both catching up and lowering costs.
This metaphor will sound familiar to students of another Lee – the late Samsung Group chairman Lee Kun-hee. In 2007, Lee warned that Korea must move rapidly upmarket to rise above being “sandwiched” between wealthy Japan and scrappier China.
These days, Trump’s tariffs and China’s overcapacity are dimming South Korea’s outlook.
“Growing strategic competition between the United States and the People’s Republic of China has ended the era when South Korea could enjoy both a robust trade relationship with China and a strong alliance with the United States,” says Evans Revere, senior fellow at the Brookings Institution, a Washington think tank.
The China effect is clear already. Last month, Korea’s semiconductor exports to China plunged at the same moment the Trump administration is slapping export restrictions on cutting-edge chips to Xi Jinping’s economy.
South Korean sales to China and Hong Kong fell 31.8% year on year in February. That’s even worse than the 22.5% decline in January. At the end of 2024, China welcomed about two-fifths of all Korean tech exports.
The problem is chronic complacency. Yoon is the fourth Korean leader since 2008 who took power pledging to generate more economic energy from the ground up, not just the top down.
Generally, that meant taking on the “chaebol system” led by family-owned behemoths like Samsung that helped propel Korea into the ranks of the top 12 economies worldwide.
The backdrop is that Korea Inc knows that so much of what it does well has been commoditized. China and other rising Asian powers are now rivals in cars, electronics, robots, ships and popular entertainment.
Taiwan is constantly raising its innovative game, while upstarts like Indonesia and Vietnam are making the race for tech “unicorn” startups more dynamic.
The best way for South Korea to maintain its high living standards is to innovate in ways that propel the economy upmarket even faster. That’s why Yoon and the three leaders who preceded him pledged an innovative “big bang” to move Korea upmarket into higher-value sectors.
Between 2008 and 2013, Lee Myung-bak came and went without fundamental changes to the chaebol system. Then came Park Geun-hye, Korea’s first female president.
In 2013, she took office with bold talk of devising a more “creative” economy. Park promised to shift tax incentives toward startups, strengthen antitrust enforcement and penalize big companies for hoarding profits that could be used to fatten paychecks.
Park ended up going easy on the chaebols. Yet she did succeed in enlivening South Korea’s startup economy. Her efforts to increase the flow of cash to innovators helped morph Korea into a top 10 incubator of tech unicorns, or companies with a market capitalization surpassing US$1 billion.
Moon Jae-in, Park’s successor, expanded the program from 2017 to 2022. Trouble is, chaebols continue to monopolize the economic oxygen startups need to grow into large game-changers.
That’s still Korea’s dilemma today. And as Yoon desperately tries to cling to power, Seoul’s political paralysis couldn’t come at a worse time for its tech-dependent economy.
Follow William Pesek on X at @WilliamPesek
