Former BOK chief warns chip boom cannot simply reverse Korea’s low-growth trend

Just a year ago, Korea was worried about falling victim to economic conditions some Korean experts have taken to calling "Japan disease." With sluggish growth and low inflation compounded by a declining birthrate and an aging population, concerns were mounting that the country could be entering a prolonged period of economic stagnation.

But sentiment has been sent on a wild swing the other way following a boom in AI investment that has fueled explosive growth in semiconductor exports. Fears that low growth could become entrenched have given way to expectations that the semiconductor supercycle could last for more than a decade.

Former Bank of Korea (BOK) Gov. Rhee Chang-yong, however, believes the current boom has not erased the downsides of the Korean economy.

“It will be difficult to reverse the long-term trend of low growth through the semiconductor boom alone,” Rhee said in an interview with the JoongAng Ilbo on Monday. He also questioned how long the boom could last, and pointed out that the current boom should not create an illusion that masks Korea’s underlying structural problems.

During his four years at the helm of the central bank, Rhee repeatedly called for structural reforms extending well beyond interest rates and exchange rates to address the declining birthrate, labor, education and real estate.

Although he has stepped down as BOK governor, Rhee continues to focus on the structural challenges facing the Korean economy. He is continuing related research and advisory work at Seoul National University and Yonsei University and, beginning this month, will also examine global economic issues as a nonresident senior fellow at the Peterson Institute for International Economics in Washington.

Structural reform ultimately remains his central concern even after leaving the central bank.

“Now I have the time to analyze these issues from a longer-term perspective,” Rhee said. “I plan to focus my research on three issues: the declining birthrate, youth employment and poverty among older adults."

“If I had to name the reform that is most necessary but also carries the greatest political cost, it would be labor market reform."

The interview was Rhee’s first with a media outlet since leaving the BOK in April. The following excerpt of the interview has been edited for length and clarity.

Q.

How long do you expect the semiconductor boom to last?

A. Many experts expect the semiconductor supercycle to last for several years, or even more than a decade, driven by heavy investment in AI. But many of those making such forecasts today were worried just a year ago that Korea’s economy would struggle because Samsung Electronics was falling behind in high bandwidth memory (HBM). No one can easily predict the future.

Are you saying we shouldn’t be overly optimistic?

Companies and investors can remain optimistic about the future of AI and semiconductors and continue investing despite the uncertainty.

But a country must prepare for every possible scenario. One factor that has strengthened Korean semiconductor companies’ oligopolistic position is that U.S.-China tensions have prevented China from importing extreme ultraviolet lithography equipment, slowing its efforts to catch up.

If U.S.-China relations improve or China develops the technology on its own, profitability could fall sharply. If the supercycle continues, it would be an unparalleled blessing, but we also need to recognize that if it does not, the recent increase in tax revenue could prove temporary.

AI investment has fueled explosive growth in semiconductor exports. This has sharply boosted corporate earnings and tax revenue, and now the government is seeking to draw up a record budget of more than 800 trillion won ($562 billion) for next year. Where do you believe the additional fiscal resources should be spent?

Providing the support needed to maintain Korea’s competitiveness in semiconductors is important. But rather than channeling all the additional resources generated by the chip boom back into the semiconductor industry, we also need to use them to address youth unemployment and the declining birthrate and to strengthen the competitiveness of other industries.

We should not assume that supporting the semiconductor industry is the same as supporting the AI industry simply because chips are doing well.

Can Korea’s recent economic growth be seen as a sign that it has moved past concerns about the “Japan disease”?

It will be difficult to reverse the long-term trend of low growth through the semiconductor boom alone.

Chips are a highly capital-intensive industry, so their direct impact on job creation is limited. Employment conditions, including youth unemployment, could even worsen before the productivity gains from AI spread throughout the broader economy.

Korea is already heavily dependent on semiconductors, accounting for 41.5 percent of the country’s total exports last month. The BOK also warned in a recent report of the potential for a form of “Dutch disease,” in which a semiconductor boom draws workers and investment away from other sectors and undermines their competitiveness. Do you believe that Korea can fall victim to the “Dutch disease”?

For now, we are not at the point where we need to worry about exchange rate movements weakening the competitiveness of other industries. The more important issue is how to manage the risks of having the fate of the national economy depend too heavily on a small number of companies and a particular industry, as was the case with Nokia in Finland and TSMC in Taiwan.

Do you think there is anything lacking in Korea’s AI policy?

There is a strong tendency to equate the development of the AI industry with that of the semiconductor industry. If you look closely at Korea’s recent policies to support the AI industry, most of them are essentially aimed at supporting chips.

We also need to ease regulations so that new technologies such as autonomous vehicles can be tested freely, and reform the education system, including university enrollment quotas and double-major programs, as well as the labor market.

With AI making it harder for young people to find jobs, how should Korea approach raising the retirement age?

AI adoption is making it increasingly difficult for young people to find jobs. In this environment, simply extending the retirement age without adjusting wages would leave younger workers bearing most of the burden.

The retirement age should be raised, but the system needs to be flexible, allowing wages for older workers to be adjusted and giving them options to work in different arrangements, including part-time.

The real estate market has also re-emerged as a critical issue that could determine the success or failure of the government. You warned during your tenure of Korea’s “real estate disease” stemming from high housing prices and household debt. How do you think Korea should tackle its real estate and household debt problems?

Stabilizing housing prices in the Seoul metropolitan area cannot be achieved through any single policy, whether it is managing overall household debt, increasing housing supply or reforming the tax system.

If people continue to move into the capital region, it will be difficult to contain housing price increases even with more supply. We need to focus on developing two or three regional hubs that can compete with Seoul. 

What direction should tax policy take?

We should treat the housing price increases and capital gains that have already occurred as a kind of sunk cost and focus instead on what policies would help stabilize the market going forward.

If we keep dwelling on who made how much money in the past and whether those gains were fair, we might ignore the reforms that are actually needed. We need to raise property holding taxes while lowering capital gains taxes to give homeowners a way to sell their properties and exit the market.

How do you assess the government’s push for productive and inclusive finance?

If the goal is to encourage banks to move beyond their focus on real estate-backed lending, strengthen their ability to assess risk and provide more financing to advanced industries and vulnerable groups, who could disagree with that?

But we need to examine whether providing more loans at lower interest rates is really the best way to help vulnerable groups.

We should also consider the risk that using the financial sector as a quasi-fiscal tool could lead to another financial crisis like the one in 1997.

You said one of the most frustrating episodes during your tenure was when you were accused of blaming the "seohak ants,” a popular term for Korean retail investors who invested in overseas stocks when the won weakened sharply in late 2025. Your analysis was based on data showing that increased overseas stock investment was a major factor behind the won’s depreciation. Recently, the local currency value has weakened. What is driving the recent exchange rate movements, and how are they different from those in the past?

Macroeconomic variables such as growth rates and interest rate differentials are more useful in explaining long-term trends. But from the second half of last year through recently, supply and demand dynamics in financial markets have played a greater role.

Does the National Pension Service also need to change its role?

As the National Pension Service has expanded its overseas investments, it has become a major player in the foreign exchange market.

To prevent its decisions from having an outsized impact on the exchange rate, it needs to increase currency hedging, adjust the pace and timing of overseas investments and diversify the ways it secures dollars.

BY OH HYO-JEONG, KIM WON [kim.jiye@joongang.co.kr]