Korea's Fiscal Room Under Threat

South Korea's fiscal health is under scrutiny as analysts warn against overestimating its financial room. The country's national debt, including this year's supplementary budget, stands at 1,412.8 trillion won, or 50.6% of GDP.

The government has lowered its national debt ratio forecast to 47.0% in its second-half economic growth strategy in July, when it raised its growth outlook. Corporate tax revenue is rising sharply on the semiconductor boom, and the government has also raised its national tax revenue forecast for next year to more than 500 trillion won.

However, mandatory government spending, such as pension and welfare costs tied to population aging, rises every year, while there is no guarantee that the current revenue gains from the semiconductor boom will continue. Analysts say foreign exchange intervention alone cannot resolve the structural drivers of the weak yen, such as massive government debt and the U.S.-Japan interest rate gap.

In Japan's bond market on the 17th, the 10-year government bond yield rose as high as 2.93%, its highest level since September 1996. The problem is that the pressure of interest payments on its massive debt makes it hard for the Bank of Japan to raise rates significantly further.