Minister: Alarm Bells Ringing over S. Korea Economy

South Korea's finance minister said Tuesday that "alarm bells" were ringing over Asia's fourth largest economy, and warned of the sort of protracted slowdown that hit Japan in the 1990s.

While stressing that South Korea's fiscal position remained "very strong" and provided a lot of room for manoeuvre, Choi Kyung-Hwan said action was needed to avoid a damaging and extended slump.

"Alarm bells are ringing that the economy is falling into a low level equilibrium" trap of stagflation, where both economic growth and price hikes become stagnant and both domestic consumption and overseas exports slump, he told journalists.

"Unless we respond in a timely manner, the Korean economy might take the road of Japan's lost decades," he added.

South Korea unveiled a 41 trillion won ($40 billion) stimulus package in July when Choi warned of a risk of recession after the economy grew at its slowest rate for more than a year in the second quarter.

Citing sluggish domestic demand in the wake of a devastating ferry disaster in April, the finance ministry also cut its forecast for economic expansion this year to 3.7 from 4.1 percent.

The stimulus includes 11.7 trillion won in expanded fiscal spending and 29 trillion won in extra financing support.

The lion's share will be spent in the remainder of this year, with 3.0 trillion won earmarked for the beginning of 2015.

"We are implementing stimulus packages but then that is to deal with sentiment that has been dampened by the Sewol ferry disaster," Choi said.

"We are making sure that we are doing this at an acceptable level ... the fiscal position will further improve over the long run," he said.

The central bank cut its key interest rate by 25 basis points to 2.25 percent last month, but Choi stressed that the rate remained high among developed countries.

"So there is still policy maneuvering room," he said.