South Korea Stares Into the Deflationary Abyss

As Japanese exporters enjoy an earnings boost from the weakened yen, their rivals in South Korea are struggling with a stronger won. Hyundai Motor’s net income fell 14 percent in 2014, the biggest decline since 2008. The automaker’s subsidiary, Kia Motors, suffered a 22 percent drop in profits, with earnings in the fourth quarter collapsing 54 percent. The picture isn’t bright for Korean retailers, either. Consumers are spending less at department stores Lotte Shopping and Shinsegae.

The bad results are adding to worries that the South Korean economy may soon stumble into a Japan-style deflationary trap. Consumer prices rose just 0.8 percent in December compared with a year earlier, and Samsung Securities expects prices in 2015 to rise less than 1 percent. From last October to December, the economy grew 0.4 percent over the previous quarter, and domestic demand contracted 0.6 percent. “Korea’s economic momentum faded quickly at the end of last year,” Mark Walton, a senior economist with BNP Paribas, wrote in a Jan. 27 report. “The breadth of the slowdown hints at a deep-seated malaise.”