Japan, Korea debate exit strategy amid recovery

TOKYO (Reuters) - Japan and South Korea agreed on Saturday on the need to start examining an exit strategy for their expansionary fiscal policies as they overcome the worst of the global recession.

But South Korea was more cautious about ending its counter-crisis measures just yet, stressing that it plans to maintain its expansionary policy stance until the country's recovery was firm.

In a joint statement issued after a bilateral financial dialogue, Japan said its economy was showing signs of a pickup due in part to a record 15.4 trillion yen ($162 billion) stimulus package.

While the emphasis was still on measures to support the economy, Tokyo will also strive to consolidate its fiscal health, the statement said.

"I think it's a bit early to talk about it at this stage, but Japan and South Korea both need to think about what to do when these abnormal economic and financial conditions are over," Finance Minister Kaoru Yosano told reporters after a meeting with his South Korean counterpart Yoon Jeung-hyun.

South Korea shared that basic stance but argued at the meeting that an exit strategy should be discussed only when there is clear evidence the economy was on a sustainable recovery path, an official from Seoul who was present told a briefing.

Governments around the world have spent hundreds of billions of dollars for stimulus measures to fight the worst economic crisis in decades. That has led to rises in global bond yields on concern that countries could issue more bonds than markets can swallow.

With the global economy now showing signs of life, markets are speculating how the governments would withdraw their counter-crisis measures.

The bilateral financial dialogue, the third of its kind following those in 2006 and 2007, did not discuss foreign reserves management. The next meeting will be held in South Korea in 2010.

Japan's economy shrank at its fastest pace since World War Two in the first three months of this year, but economists expect it to begin a slow fragile recovery this quarter.

The government's record stimulus package, sized at 5 percent of gross domestic product, offered some support but also worsened Japan's already dire fiscal state. The country's outstanding public debt is already around 170 percent of GDP.

South Korea's economy skirted past a recession in the first quarter and data has suggested an improvement in economic conditions in the second quarter. But the finance minister said on Thursday he was not confident that the pace of recovery could be sustained well into the second half.

($1=95.11 Yen)

(Reporting by Yuko Yoshikawa; Writing by Leika Kihara; Editing by Sugita Katyal)