🚨 Debt Crisis Warning: Korea's Private Debt Near Japan's Bubble Peak, Urgent Reforms Needed

Today Korean Economic News | 2025.06.06

📌 Private Debt at 207.4% of GDP, Near Japan's Bubble Peak... Fear of "Lost 30 Years"

💬 Korea's private debt has reached 207.4% of GDP, approaching the peak levels of Japan's 1990s bubble economy, raising alarms in economic circles. The debt structure focused on real estate shows similar patterns to Japan's bubble collapse, increasing concerns. With accelerating population aging and changing global trade order creating double pressure, experts say proactive structural reforms are urgent to avoid following Japan's "lost 30 years" path. Experts emphasize that "Korea must learn from Japan's experience and work on improving debt structure and finding new growth engines."

1️⃣ Easy to Understand

Our country's debt has risen to levels similar to Japan just before its economic crisis 30 years ago. This shocking analysis is not just a number, but an important warning signal that could determine our economy's future.

'Private debt' means all the money borrowed by individuals and companies combined. Korea's private debt reaching 207.4% of GDP means we owe more than twice the amount of money our country earns in one year. This is very similar to Japan's situation just before its real estate bubble burst in the 1990s.

In the early 1990s, Japan experienced a 'bubble economy' where real estate and stock prices soared. Many people believed 'real estate prices never fall' and borrowed money to buy properties. But when the bubble burst in 1991, real estate prices crashed, leaving people with huge debts. As a result, Japan experienced the "lost 30 years" where economic growth stopped for over 30 years.

Korea is now facing similar risks. Over the past few years, real estate prices have risen sharply, and many people took out excessive loans to buy homes. Young people especially engaged in risky borrowing to the point where the term "young-kkeul" (borrowing with your soul) was created.

What's more worrying is that Korea, like Japan, is rapidly aging. The number of working people is decreasing while the elderly population is growing, reducing economic vitality. Additionally, the global trade environment is becoming difficult due to trade conflicts between the US and China.

But there's no need to despair. If we prepare in advance by learning from Japan's experience, we can turn crisis into opportunity. The government must guide funds concentrated in real estate to other productive areas and develop new technologies and industries. Individuals should also focus on stable asset management rather than excessive borrowing.

Now is the crucial time to change our economy's structure. To avoid following Japan's path, fundamental changes are needed starting now.

2️⃣ Economic Terms

📕 Private Debt

Private debt means the total amount of money borrowed by households and companies from financial institutions.

• This includes mortgage loans, credit loans, and corporate loans.
• The higher the private debt ratio to GDP, the greater the economy's risk.
• Korea's 207.4% is similar to Japan's peak during the bubble period.

📕 Bubble Economy

A bubble economy means asset prices have risen excessively beyond their real value.

• This happens when real estate or stock prices surge due to speculation, regardless of actual value.
• Japan's 1990s case, where real estate and stock prices soared then crashed, is a typical example.
• When bubbles burst, they can shock the entire economy and lead to long-term recession.

📕 Lost 30 Years

This refers to Japan's long-term economic stagnation lasting over 30 years since the 1990s bubble collapse.

• After the 1991 real estate bubble burst, Japan's economy barely grew.
• This resulted from a combination of debt problems, population aging, and deflation.
• It means Korea needs structural reforms to avoid following Japan's path.

📕 Structural Reform

Structural reform means changing the fundamental nature and system of an economy.

• This includes industrial structure changes, regulatory reform, and labor market flexibility.
• Unlike short-term economic stimulus, it fundamentally changes the economy's structure.
• Though it takes time, it's essential for long-term economic development.

3️⃣ Analysis and Economic Outlook

✅ Similarities and Differences Between Korea and Japan's Bubble Economy

• Let's examine risk factors by comparing Japan's 1990s bubble economy with Korea's current situation.

  • First, there are striking similarities in debt size and structure. Japan's private debt reached 215% of GDP in 1990, and Korea is now at 207.4%, approaching that level. More concerning is the debt composition. Like Japan during its bubble period, Korea has real estate mortgage loans making up 75% of total household debt. These debts formed during rapid real estate price increases can become major risk factors when property prices fall. In Japan's case, when real estate prices collapsed in 1991, bad loans surged, becoming a major cause of long-term recession. Korea is also exposed to similar risks as real estate price increases have recently slowed.

  • Second, there are common factors of demographic change and economic growth slowdown. Japan began experiencing declining birth rates and aging from the 1990s, and Korea is experiencing the same phenomenon at an even faster pace. Korea's total fertility rate is 0.72, lower than Japan's, and the aging speed is the world's fastest. Decreasing working-age population reduces economic growth potential and weakens debt repayment capacity. Japan fell into long-term recession partly because it failed to properly respond to these demographic changes. Korea faces the same problem and needs proactive responses.

  • Third, however, Korea has different opportunity factors from Japan. The biggest difference is the global environment. While Japan experienced crisis in a relatively isolated situation in the 1990s, Korea is now deeply integrated into global value chains, offering greater opportunities to utilize external chances. Especially with new growth engines emerging like digital transformation, green energy, and bio-health. Also, Korea's technological innovation capacity and export competitiveness are relatively better than Japan during its bubble period. The global spread of K-culture also provides new growth opportunities.

• For Korea to avoid following Japan's path, it must focus on improving debt structure while discovering new growth engines. The key is not simply reducing debt but reallocating resources to productive sectors.

✅ Risks of Real Estate-Centered Economic Structure

• Let's analyze the problems and solutions of Korea's economic structure excessively focused on real estate.

  • First, a structure where real estate dominates the entire economy has become entrenched. About 75% of Korean household assets are concentrated in real estate, and companies also tend to focus on real estate investment rather than business expansion. This causes resource allocation distortion and hinders productivity improvement. When real estate prices rise, consumption increases and the economy improves, but conversely, when real estate prices fall, the entire economy falls into recession - a vulnerable structure. Recent weakening consumer sentiment alongside slowing real estate price increases demonstrates this. In such a structure, real estate price fluctuations greatly affect economic stability.

  • Second, real estate speculation is hindering real economy growth. Young generations are focusing on real estate investment rather than starting businesses or developing technology, reducing innovation capacity. Companies have also become more inclined to seek profits through real estate investment instead of R&D or facility investment. This is a factor that weakens the economy's competitiveness in the long term. Also, rising real estate prices have increased rents and business costs, making startup operations and small business management difficult. Ultimately, the real estate-centered economic structure has become a barrier preventing new growth engine creation.

  • Third, it's deepening income inequality and generational conflict. The gap is widening between older generations who bought real estate early and young generations who must buy homes at high prices or give up entirely. Social conflict is intensifying as class becomes entrenched based on real estate asset ownership. This harms social stability and hinders utilization of human capital, which is the driving force of economic development. Solutions include expanding real estate supply, increasing rental housing, and expanding investment options beyond real estate. Particularly important is activating stock markets and expanding innovative company investment to guide funds toward productive sectors.

• Breaking away from a real estate-centered economy requires fundamental mindset changes. A new economic paradigm is needed that views real estate as a means of housing rather than speculation, and focuses resources on innovation and productivity improvement.

✅ Need and Direction for Proactive Structural Reform

• Let's present Korea's structural reform direction to avoid Japan's "lost 30 years."

  • First, industrial structure advancement and diversification are urgent. Korea still has a structure highly dependent on manufacturing, especially semiconductors and automobiles. Such a structure is inevitably vulnerable to global economic fluctuations. Therefore, we must increase service industry productivity and actively foster future industries like AI, bio, and green energy. Particularly important is developing new business models utilizing Korea's strengths in IT technology and cultural content. The government must create an environment for new industries to establish themselves through regulatory reform, and companies must attempt innovative endeavors crossing existing business boundaries.

  • Second, we must simultaneously increase labor market flexibility and inclusiveness. Korea's current labor market has a dual structure with large gaps between regular and irregular workers. This blocks efficient labor allocation and hinders innovation. While enabling companies to adjust workforce as needed through labor market flexibility, we must simultaneously strengthen social safety nets to reduce worker anxiety. It's also important to expand lifelong education and job training to cultivate workers who can adapt to changing industrial environments. Particularly in preparation for an aging society, we must increase elderly economic participation and expand women's and foreigners' labor market participation.

  • Third, we must support growth engines through financial system innovation. Korea's current financial system is excessively concentrated on real estate collateral loans. This must be improved so funds flow smoothly to innovative companies and startups. We must create diverse funding channels through venture capital and private equity activation, crowdfunding expansion, and fintech development. Household asset portfolios should also be guided to diversify from real estate-centered to stocks and funds. This requires increasing capital market transparency and stability and strengthening investor protection systems.

• Structural reform is difficult to achieve results in the short term, but it's an essential process for long-term economic development. Success requires government, companies, and individuals to all recognize the need for change and actively participate.

4️⃣ In Conclusion

The fact that Korea's private debt has approached Japan's bubble period levels means our economy stands at a critical crossroads. However, this should be viewed as an opportunity for change rather than a reason for despair. If we respond proactively by learning from Japan's experience, we can turn crisis into opportunity.

Most importantly, we must accurately recognize reality. A real estate-centered economic structure and excessive debt are not sustainable. In an environment of population aging and intensifying global competition, we can no longer grow with existing methods.

However, Korea has different opportunity factors from Japan. Strong technological innovation capacity, global cultural influence, and young generation creativity can become new growth engines. The important thing is how to utilize these strengths.

The government must guide funds concentrated in real estate to productive sectors and engage in regulatory reform to foster new industries. Companies must not be consumed by short-term profits but increase innovation investment for long-term competitiveness. Individuals must also prepare for the future through self-development and diverse investment rather than real estate speculation.

Time is limited. Just as Japan wasted 30 years after bubble collapse, we could walk the same path if we miss the response timing. However, if we engage in fundamental change starting now, we can create different results from Japan.

Ultimately, this crisis can become a turning point for Korea's economy to develop into a more mature and sustainable form. If all economic actors recognize the need for change and work together, we can create opportunities for new leaps beyond crisis.