Buoyant exports, driven in large part by China, have led the expansion, while domestic demand has remained weak since the end of the household credit bubble. A gradual recovery in private consumption is projected to sustain economic growth in the 4 to 5% range in 2005 and 2006, despite some moderation in export growth.

Further reforms are needed to address the structural causes of weak domestic demand, notably debt delinquency and problems that discourage business investment. Monetary policy should maintain its expansionary stance until domestic demand recovers, while the appreciation of the won should be allowed to continue, in line with the country’s flexible exchange rate policy. The recently announced “Comprehensive Investment Plan” which is intended to boost demand, should aim at promoting economic efficiency.