Trump's Unique Interest Rate Cut Strategy

Former President Donald Trump proposed a method to tackle inflation by directly pressuring corporate CEOs instead of raising interest rates. He called in oil company CEOs to pressure them to lower prices and reduced the mandatory blending ratio for biofuels to encourage companies to cut costs. Despite the potential for backlash from his supporters, such as farmers, Trump indicated his willingness to push forward, citing political urgency.

Former President Trump holds a unique economic view that interest rate cuts are necessary even when the economy is growing and overheating. He interprets improved corporate performance and credit ratings as grounds for interest rate cuts, directly contradicting conventional economic principles regarding benchmark interest rates. He even advocates for a 20% GDP growth theory, emphasizing the need for rate cuts, thus adhering to unconventional economic policies.

Japan chose to sell U.S. Treasury bonds to defend against the depreciation of the yen, rather than raising interest rates. However, this highlights the dilemma faced by Japan, the largest holder of U.S. Treasury bonds. With a debt-to-GDP ratio exceeding 200% and 30% of its government budget allocated to principal and interest payments, an interest rate hike would be a significant financial burden for Japan. Nevertheless, Japan's sale of Treasury bonds also impacts U.S. interest rates, drawing opposition from the U.S.

To avoid the burden of interest rate hikes, Japan chose to directly purchase yen to defend its value. To do this, Japan sold its holdings of U.S. Treasury bonds to secure dollars, and then intervened in the market by using these dollars to buy yen. However, this approach resulted in pressure from the U.S. Treasury Secretary to halt the sale of Treasury bonds.

The U.S. indirectly urged Japan to refrain from selling Treasury bonds and to address the yen's depreciation through interest rate hikes. In response, the Governor of the Bank of Japan hinted at the possibility of discussing interest rate hikes at the next monetary policy meeting, with both the Japanese government and the Bank of Japan aiming to induce a stronger yen.

Japan faces market distrust regarding its fiscal management capabilities due to its enormous government debt, which exceeds 200% of GDP. Specifically, a reduction of the consumption tax rate from 8% to 1% is expected to decrease annual tax revenue by 37 trillion won, exacerbating concerns about the lack of clear measures to cover the fiscal deficit. This situation acts as a major factor threatening Japan's economic stability.

The Honnemoto Shock, derived from a word meaning 'strong framework,' refers to the fear felt by market participants when the government fails to demonstrate a strong will for structural reforms. The market demands strong government resolve and policies for long-term economic improvement rather than short-term stability.

French government bond yields have shown the most significant increase among EU countries, at one point even surpassing Italy's. This indicates growing market concern over France's finances, suggesting that France is emerging as the most unstable sovereign bond issuer in Europe.

France's fiscal deficit is difficult to resolve due to structural issues such as interest expenses and social welfare budgets. Interest expenses in the 2027 budget draft are projected to increase from 63.8 billion euros to 74.2 billion euros, adding realistic difficulties to achieving the goal of reducing the fiscal deficit to 3% of GDP by 2029.

With no majority party in parliament ahead of France's presidential election in April 2027, strong leadership needed for fiscal austerity and structural reforms is hindered. This political instability impedes efforts to resolve fiscal weakness and deepens market distrust. In particular, structural reforms to achieve fiscal targets require strong political resolve, but France's current political situation makes it difficult to support such efforts.

Recently, South Korea recorded a large trade surplus, with export prices surging by 47% primarily due to semiconductors, despite import prices rising by 19%. This export boom leads to an increase in national income, boosting the purchasing power of households and businesses, which in turn causes demand-driven consumption growth and inflation.

When inflation occurs across the entire economy, not just in specific sectors, monetary policy through interest rate adjustments is essential. Since interest rates affect all economic sectors, such a situation provides justification for deciding on an interest rate hike based on core inflation. This serves as an important policy tool to respond to structural inflation.

The economic situations of various countries present complex dilemmas for interest rate policy decisions. The U.S. shows AI-driven growth, but political pressure, such as from Trump, makes interest rate hikes difficult. Japan struggles with rising interest rates due to worsening fiscal health and the depreciation of the yen. In contrast, South Korea is evaluated to have achieved relatively stable defense in the current situation thanks to its preemptive interest rate hikes.

Even if interest rates are raised during an economic boom, vulnerable populations will inevitably face difficulties. The role of supporting these vulnerable groups falls within the government's fiscal domain, not the monetary authority like the Bank of Korea. In fact, the Korean government has prepared a super-budget of over 800 trillion won in anticipation of such situations, emphasizing the importance of fiscal support for the protection of vulnerable groups.

There are two core principles for fiscal input. The first is to help vulnerable groups who may be weakened by interest rate hikes, among other things. The second is to avoid short-term cash handouts and invest in areas that can increase long-term potential growth. This aims to create sustained tax revenue by focusing on future growth engines such as youth job creation, nurturing new businesses, and R&D investment. These two pillars—supporting vulnerable groups as a side effect of growth and investing to secure growth drivers—must be pursued simultaneously.

The Future Response Fund is a fund set aside by the state during economic booms to be used for long-term investments and as a fiscal buffer in the future. A certain percentage of this fund can be managed as a supplementary measure for when economic conditions worsen and tax revenues decrease. What is important is that the detailed plans for such budget operations and the government's flexible fiscal management capabilities must be verified.