South Korea's current account surplus hit a record $123.05 billion last year. In April this year, it recorded a surplus of $28.29 billion. A current account surplus typically boosts the dollar supply and strengthens the won, but the opposite is happening now.
The market sees the semiconductor-driven, one-legged stock rally as producing a chain of effects on exchange rates, interest rates and financial firms' funding conditions. Take the exchange rate: as semiconductor stocks surged, foreigners dumped profit-taking volumes, fueling the won's depreciation.
This year, foreigners net-sold 149.0464 trillion won in the stock market alone in the first half. Converted to dollars, that amounts to $99.36 billion (based on a won-dollar rate of 1,500), equivalent to 23.3% of the foreign exchange reserves at the end of June ($427.4 billion). This is six to seven times larger than in the first half of 2008 during the global financial crisis (22.929 trillion won) and the first half of 2020 when the COVID-19 pandemic crisis peaked (21.457 trillion won). Foreigners have sold another 12.53 trillion won worth so far this month.
The National Pension Service's move to raise its domestic stock weighting and suspend rebalancing is affecting the bond market. Because the NPS maintains a high stock weighting, its bond purchases inevitably decline relatively. An exchange rate above 1,500 won per dollar also stimulates import prices, pushing up market interest rates and increasing the likelihood of further policy rate hikes.
Deposits at commercial banks and non-bank financial institutions flowing out to the semiconductor-led stock market is another factor pressuring interest rates. Deposits at non-bank institutions such as the National Agricultural Cooperative Federation, MG Community Credit Cooperatives and credit unions have fallen by more than 15.2 trillion won this year. Some savings banks are offering interest rates in the 4% range, which leads to higher lending rates and delinquency rates. As of the end of March, the volume of non-performing loans to small and medium-sized enterprises stood at 10.5 trillion won, the highest since March 2016.
Experts predict this vicious cycle will intensify as the market's skew worsens. In fact, of the 125 trading days this year, the KOSPI closed up or down by more than 3% on 41 days. That means volatility exceeding 3% appeared roughly one day in three. In June alone, the index moved more than 3% on 11 of 21 trading days. In 2024 and 2025, the index moved more than 3% on only four and nine days, respectively.
Some argue that, given the alarming external uncertainty, measures should be prepared to stabilize the financial market. On concerns over the Takaichi Sanae cabinet's expansionary fiscal policy, Japan's 10-year yield rose above 2.8%, reaching its highest level since 1996. In the wake of the super-weak yen, the currencies of Asian emerging markets have all plunged this year, including the Indonesian rupiah (7.34%), Indian rupee (6.27%), Thai baht (5.82%) and Philippine peso (4.50%). Lee Seung-heon, a professor of economics at Soongsil University, noted, "The market is being excessively shaken and exposed to volatility."
