SEOUL, January 16 (AJP) - East Asia is no longer a monolith but a disparate economic powerhouse that accounts for roughly a quarter of global GDP and a third of world trade. For years, the combined output of its leading quartet—China, Japan, South Korea and Taiwan—has surpassed that of the euro zone, underpinned by an export engine that remains the envy of the West.
Beneath this shared headline strength, however, a deep monetary divergence is taking hold. Nowhere is the split more visible than in the policy corridors of the region’s central banks. As growth models diverge, so too do interest-rate paths—revealing sharply different economic realities among neighbors once viewed as a bloc.
Japan: BOJ tightening stirs domestic friction and global tremors
Since his appointment in 2023, Bank of Japan Governor Kazuo Ueda has moved decisively to dismantle Japan’s decades-long zero-rate regime. Starting with a hike from -0.1 percent to 0.1 percent in March 2024, the BOJ has delivered successive increases—to 0.25 percent, 0.5 percent and, most recently, 0.75 percent in December—bringing the benchmark rate to the brink of 1 percent.
The pivot is fundamentally defensive. Consumer inflation has remained above 2 percent since 2022, a sustained stretch not seen since the bubble era. After years of dismissing inflation as transitory, the BOJ has been forced to respond to a cost-of-living squeeze that is increasingly entrenched.
At the core of Japan’s inflation problem lies the yen.
Ultra-low rates long enabled the yen carry trade, in which investors borrowed cheaply in yen to chase higher returns overseas. While this strategy supported exports, an excessively weak currency has become a liability—raising import costs and amplifying inflation. Japan imports more than 60 percent of its food on a caloric basis and roughly 80 percent of its energy, leaving the economy acutely vulnerable to currency depreciation.
Political resistance remains a constraint. Prime Minister Sanae Takaichi, a staunch defender of Abenomics, has previously dismissed rate hikes as “stupid.” During a meeting with Ueda last November, she reportedly offered little more than a noncommittal “I see,” stopping short of endorsing the tightening path.
Global markets are also on edge. Higher Japanese rates threaten to unwind an estimated ¥500 trillion ($3.26 trillion) in carry-trade positions. The risks were laid bare on Aug. 5, 2024, when a sudden reversal triggered synchronized sell-offs across markets from New York to Seoul.
Still, doubts persist over how far tightening can go.
“Japan’s growth turned negative in the third quarter of last year, real wage gains continue to disappoint, and corporate investment remains weak,” said Jung Yong-taek, a senior researcher at IBK Securities, adding that growth projections for 2026 have slipped back below 1 percent.
“With the fiscal deficit near 5 percent and Prime Minister Takaichi pressing for renewed quantitative easing, we expect at most one additional rate hike this year,” Jung said.
Nomura Securities echoed that view in its Japan Macro Outlook 2026, forecasting a pause in the BOJ’s tightening cycle as policymakers wait to see whether core inflation slips below the 2 percent target. Similar caution has been expressed by global asset managers including Morgan Stanley and BlackRock.
China: Aggressive easing fails to awaken a somnolent economy
China stands at the opposite extreme. Beijing has slashed its loan prime rate from 3.85 percent in 2021 to a record low of 3 percent by May last year, flooding the system with liquidity in hopes of reigniting growth.
The strategy has succeeded—at least on the industrial front. Output surged, reinforcing China’s position as the world’s factory. In 2025, the country posted a record $1.2 trillion trade surplus. BYD overtook Tesla in electric vehicles, while ChangXin Memory Technologies emerged as the world’s fourth-largest memory-chip maker.
Yet the benefits have largely bypassed households.
Ultra-low rates accelerated the implosion of a property sector that holds roughly 70 percent of household wealth. As defaults mounted, home prices fell more than 20 percent. With savings offering minimal returns, households had little buffer against the collapse—deepening the real estate downturn rather than cushioning it.
Consumption remains anaemic. Consumer inflation has stayed below 1 percent, reflecting persistent deflationary pressure. Retail sales growth has slowed to around 1 percent—an abrupt drop in an economy once accustomed to 8 percent expansion—casting doubt on Beijing’s 5 percent growth target.
Producer prices tell a similar story, falling 1.9 percent in December as overcapacity fuels cutthroat price wars. Excess supply continues to overwhelm domestic demand, eroding margins and confidence.
Beijing is widely expected to stay dovish.
“After the Communist Party designated domestic demand-driven growth as a core priority for 2026 at December’s Central Economic Work Conference, accommodative policy is likely to persist,” said Park Soo-jin, a researcher at Mirae Asset Securities.
Still, Park cautioned that the limits of monetary easing are becoming clear. China’s M2 money supply continues to decelerate despite rate cuts, underscoring waning transmission. Attention is now turning to the March “Lianghui” meetings, where authorities are expected to outline structural reforms beyond liquidity injections.
South Korea and Taiwan: A shared pause, divergent realities
South Korea and Taiwan—key pillars of the global semiconductor supply chain—have both opted for policy stasis. The Bank of Korea has held its benchmark rate at 2.5 percent since May 2025, while Taiwan’s central bank has kept rates at 2 percent for nearly two years.
The similarity ends there.
In Seoul, the pause reflects constraint. The won has weakened more than 4 percent against the dollar from its 2024 average, trading near 1,474 as of Friday. With a 1.25 percentage point yield gap with the United States, further cuts risk accelerating capital outflows and currency depreciation—especially as the yen regains strength.
BOK Governor Rhee Chang-yong reinforced this hawkish bias on Thursday by removing references to “possible rate cuts” from the policy statement. While ruling out further easing, he also acknowledged that hikes cannot be an option due to South Korea’s 1,800 trillion won ($1.33 trillion) household debt burden.
Property-related loans alone exceed 1,000 trillion won. A rate hike, Rhee warned, could destabilize housing rather than contain it—triggering defaults and a sharper downturn.
Taiwan’s inaction, by contrast, reflects confidence.
The economy is projected to grow 7.4 percent in 2025, according to the Central Bank of the Republic of China—far outpacing South Korea’s 1.8 percent forecast. Taiwan’s GDP per capita has overtaken Korea’s for the first time in more than two decades, while its $138 billion trade surplus is nearly double Seoul’s.
The engine is semiconductors. TSMC, the linchpin of the global AI supply chain, is expected to post record revenues of $122 billion and operating profits of $60 billion. With exports driving growth, policymakers see little reason to risk tightening.
Domestic conditions are equally benign. Inflation remains near the 2 percent target, and the Taiwan dollar has been stable around 31 to the U.S. dollar.
Unlike South Korea, Taiwan can afford to wait.
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