Same oil shock, different results: Inflation squeezes Korea, Japan while Taiwan sees smooth sailing

Three months into the Iran war, higher oil prices have delivered different bills to economies around the world.

Korea and Japan face growing pressure to raise interest rates as growth and inflation accelerate together, while Taiwan still has room to keep rates unchanged despite a semiconductor boom, with inflation remaining relatively tame.

Korea has fallen into what some economists describe as a growth paradox. While many households continue to feel financial strain, the country's growth and inflation are picking up on the back of a semiconductor-driven export boom and increasing pressure on the central bank to raise the key rate.

On Wednesday, the Organisation for Economic Cooperation and Development (OECD) raised its forecast for Korea's economic growth this year to 2.6 percent from 1.7 percent projected three months earlier. The revision contrasts the OECD's decision to lower its forecast for global growth to 2.8 percent from 2.9 percent.

Higher oil prices typically worsen Korea's terms of trade and slow economic growth because of the country's heavy dependence on imported energy. But this time, strong semiconductor and IT exports have offset much of the shock.

The Bank of Korea (BOK) raised its forecast for this year's economic growth to 2.6 percent from 2.0 percent in May. It also raised its inflation forecast to 2.7 percent from 2.2 percent.

"Korea is similar to the eurozone in that it is sensitive to energy price shocks," said BOK Gov. Shin Hyun-song during an international conference hosted by the central bank on Monday. "The important difference is that Korea's growth momentum is very strong."

Korea's GDP grew 3.6 percent on year in the first quarter, and gross domestic income rose 12.3 percent on year. The OECD estimates that Korea's nominal economic growth rate — real growth plus the GDP deflator, a broad measure of prices — will reach 10.4 percent this year.

Consumer prices rose 3.1 percent in May from the previous year, a larger increase than the 2.6 percent rise in April. Core inflation in May increased to 2.5 percent, compared to 2.2 percent in April. Prices for everyday necessities rose 3.3 percent in May, up from 2.9 percent in April.

Japan, another energy importer, is also facing growing pressure to raise interest rates, as exports and businesses help prevent an economic slowdown despite the oil price shock.

Consumer prices rose just 1.4 percent on-year in April, restrained by government fuel subsidies. But producer prices climbed 4.9 percent, the highest level since May 2023, and import prices surged 17.5 percent on year. Japan's first-quarter GDP rose 2.1 percent on year.

"Under current economic conditions, it is hard to imagine that the Bank of Japan would not raise interest rates in June," said Makoto Sakurai, a former Bank of Japan policy board member.

Eurozone consumer prices rose 3.2 percent in May from a year earlier, according to Eurostat, the European Union's statistics agency. This marks the fourth consecutive monthly increase since January's 1.7 percent increase. In the United States, consumer prices increased 3.8 percent in April, the highest level since May 2023.

While many countries are seeing rising consumer prices, Taiwan is seeing minimal price hikes despite its economy booming on semiconductor exports.

Taiwan's economy is expected to grow 9.64 percent this year, the biggest increase in 16 years. Its economy grew 14.55 percent in the first quarter, the highest in 48 years.  

However, consumer prices are forecast to rise just 1.93 percent. The figure is even below its central bank's 2 percent target, allowing policymakers to keep the benchmark interest rate unchanged at 2 percent in March.

Analysts attribute the outcome to the stability of the Taiwan dollar. Government management of energy prices has also helped prevent higher oil costs from feeding through to consumer prices.

"There is no inflation pressure [...] The central bank does not need to use its monetary policy," said Kevin Wang, an analyst at Masterlink Investment Advisory.

In the United States, where interest rates already stand between 3.5 percent and 3.75 percent, the case for rate cuts is weakening.

According to Bloomberg, forecasts for U.S. second-quarter GDP growth were revised up to 2.1 percent at the end of May from 1.8 percent previously. The consumer price index is forecast to rise 3.9 percent, up from the previous forecast of 3.6 percent.  

Inflation in Europe would normally support further rate hikes by the European Central Bank (ECB), but economic growth is projected at just 0.9 percent.

"The policy reaction will depend very much on the extent to which the higher costs are being passed through to prices," said Isabel Schnabel, member of the executive board of the ECB, during an interview with Reuters in May. "And this again will depend on the resilience of the economy."

Korea may be weathering the crisis thanks to strong growth, but that same strength could ultimately keep interest rates high longer.

"Inflation is likely to peak at 3.5 percent in August and remain around 3 percent during the second half of the year," said Kim Myung-sil, a researcher at iM Securities. "The issue isn't how many times rates are raised but how long high interest rates remain in place."

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.

BY KIM WON, NAM SOO-HYOUN [lee.taehee2@joongang.co.kr]