Roller KOSPI Market, a Bill for State Governance Relying on Stock Prices[Insight] Why Stock Market Growth Should Not Be the Goal of State Governance

Dr. Kangkook Lee is Professor of College of Economics at Ritsumeikan University in Japan and Affiliated Research Fellow at CUKPE

Since the launch of the Lee Jae-myung administration, the South Korean stock market has been met with mixed cheers and sighs. The KOSPI index surged more than threefold from 2,770 on June 4, 2025, the day the president took office, to 9,115 on June 22, 2026, approximately one year later. However, it subsequently plummeted, falling to 5,593 in July, before recovering to 6,978 as of August 14. 

Since its inception, the Lee Jae-myung administration has made various efforts to resolve the so-called "Korea Discount," a phenomenon in which the stock prices of Korean companies are undervalued relative to their earnings, and to realize a "money move" that shifts funds concentrated in the real estate market to the stock market. To strengthen shareholder rights and improve corporate governance, the Commercial Act was amended three times to include provisions such as expanding the scope of directors' fiduciary duties from the company to shareholders and mandating cumulative voting (a system that allows shareholders to cast votes equal to the number of shares they hold for a specific director candidate) for large conglomerates. 

Meanwhile, the government withdrew plans to tighten the criteria for "major shareholders" subject to capital gains tax on stocks and introduced separate taxation (a method of applying a separate tax rate without combining it with other income) on dividend income from high-dividend companies. It also withdrew the introduction of the financial investment income tax on income earned from financial investments, such as stocks. Given that the KOSPI index has risen significantly since the president took office, one wonders if the government's efforts have truly been a success.

Rollercoaster stock market, unprecedented volatility and concentration

While government policies played a role, the primary reason for the stock market surge was undoubtedly the improvement in corporate earnings . Above all, driven by the artificial intelligence (AI) boom, the revenue and operating profits of semiconductor companies increased significantly. For instance, SK Hynix's operating profit was approximately 47 trillion won in 2025, but in 2026, it is projected to range from 170 trillion to nearly 300 trillion won, depending on forecasts from various securities firms. Although the company's stock price has declined since the end of June this year, it remains more than tenfold higher than it was at the time of the President's inauguration last June. Companies across various sectors—including power equipment, defense, and cosmetics—as well as semiconductors, earned profits through increased exports. The total operating profit of all KOSPI-listed companies is projected to rise from approximately 245 trillion won in 2025 to over 800 trillion won in 2026.

However, the Korean stock market has undergone rapid changes since the end of June. Both the KOSPI and KOSDAQ indices plummeted through the end of July, and with daily volatility becoming extremely high, investors felt as though they were riding a bumpy roller coaster. The KOSPI index fell by 39% from its peak to its low point on July 30, while the KOSDAQ index plunged by a staggering 47% from its peak in late April to its low point in late July. Such a short-term crash is more severe than during the 2008 global financial crisis or the COVID-19 pandemic. In particular, the stock market has shown extreme volatility and market concentration since June, raising serious concerns.

Instability Fueled by the Launch of Single-Stock 2x Leverage ETFs

The most significant cause cited is the single-stock 2x leverage ETF (Exchange Traded Fund) based on Samsung Electronics and SK Hynix, launched on May 27. These 16 ETF products are derivatives designed to track the daily returns of individual stocks at double the rate; it is pointed out that the rebalancing process—involving buying and selling spot and futures to meet target leverage ratios near market close—actually amplifies the price fluctuations of the underlying underlying stocks. It is a case of the tail wagging the dog.

The problem was that at the time, Samsung Electronics and SK Hynix accounted for nearly half of the KOSPI market, and the stock price volatility of semiconductor companies was particularly high. For this reason, concerns were raised from the moment this product was introduced that it could significantly amplify market volatility. Indeed, since June, there has been a sharp increase in the activation of "sidecars" (a system that temporarily suspends the validity of program trading orders) and "circuit breakers" (a system that temporarily halts trading when stock prices fall by more than a certain margin) triggered during market volatility. Circuit breakers, which are triggered when stock prices plummet by more than 8%, have been activated a total of 15 times on the KOSPI since 2000, with six of these instances concentrated after May 27. 

The Korean stock market has been assessed as being more volatile than the Bitcoin market, and foreign media have pointed out that the market has turned into a gambling den, making it difficult to invest in. As stock prices repeatedly fluctuate in this way, 2x leveraged ETFs see their returns decline due to the so-called 'volatility decay' effect, causing investors in these products to suffer losses.

Since the launch of this ETF product, the concentration of market activity has also intensified significantly. In July, the average daily trading volume of single-stock 2x leverage ETFs reached approximately 13 trillion won, whereas the total daily trading volume of the KOSDAQ market, which stood at around 15 trillion won from the beginning of the year until the end of May, plummeted to the 6 trillion won range in July. KOSDAQ stock prices have fallen sharply since June, and there were many instances where even blue-chip companies saw their share prices cut in half. 

It came as a bolt from the blue for retail investors who had trusted the words of some politicians talking about the "era of KOSDAQ 3,000." As criticism mounted, the government belatedly introduced measures starting July 31 to raise the deposit requirement (the minimum amount that must be deposited with a securities firm in advance to trade risky products such as leveraged ETFs) from 10 million won to 30 million won and expand the trading unit. With the introduction of these regulations coinciding with a sharp drop in semiconductor company stock prices, the trading volume of this product decreased significantly in August, and the KOSPI 200 Volatility Index (VKOSPI, commonly referred to as the "fear index") also fell sharply.

According to some reports, the government, under the leadership of the Blue House, hastily introduced a single-stock 2x leverage ETF listed on the Hong Kong exchange into the domestic market, citing concerns that it fueled capital outflows and currency appreciation. Working-level officials at the financial authorities expressed concerns at the time, and Lee Chan-jin, Governor of the Financial Supervisory Service, reportedly expressed regret on June 22, stating, "We should have stopped it then, even if it meant lying down in protest." While the government explained that the product partially curbed overseas stock investments by retail investors during the first half of the year, that effectiveness remains questionable. Ultimately, it can be said that the single-stock 2x leverage ETF only amplified side effects such as excessive market volatility, market concentration, and investor losses. Deep reflection on the policy-making process is required.

National Pension, rising exchange rates, and stock market overheating

Criticism is being raised that the National Pension Service's suspension of rebalancing has increased instability in the stock market. ©SBS News YouTube Screenshot

Even before the sharp decline in stock prices and intensified volatility occurred after June, there were various side effects caused by the surge in the stock market. In the first half of the year, the exchange rate rose significantly along with the surge in stock prices. Based on the Bank of Korea's buying and selling rates, the won/dollar exchange rate rose from 1,435 won per dollar on January 2, 2026, to 1,548 won on July 1. It was particularly unusual that the exchange rate rose despite the current account surplus in the first half of the year increasing to $191 billion, approximately four times higher than the same period last year.

As pointed out by the Financial Times, one cause of the won's depreciation was the so-called "DRAM dollar" phenomenon. Although Korean semiconductor companies earned a significant amount of dollars through increased exports, they did not convert these earnings into won due to concerns about overseas investment possibilities and the uncertainty of exchange rate fluctuations. Corporate dollar deposits in commercial banks increased sharply, and while the government attempted to encourage currency exchange, these efforts were largely ineffective.

However, the biggest cause of the exchange rate rise at the time was that foreign investors sold Korean stocks and left. According to the Bank of Korea, there was a net outflow of approximately $110 billion in foreign investors' funds invested in Korean stocks from January to June. This was due to rebalancing (readjusting asset allocation weights to the original target) following the surge in the Korean stock market. Foreign institutional investors typically hold stocks from various countries based on weights derived from the MSCI index (an international stock index calculated by Morgan Stanley Capital International, which global institutional investors use as a standard for asset allocation) within their total assets. However, as the KOSPI surged, the valuation of Korean stocks became much larger than the target weight; to reduce this, they sold stocks to cut their holdings, and the outflow of funds in this process caused the won/dollar exchange rate to rise.

During this process, controversy arose regarding whether the change in the National Pension Service's investment strategy during the first half of the year was related to the rise in the exchange rate. Originally, the National Pension Service held 14.9% of its total assets in domestic stocks, and could hold up to 19.9% ​​when combining Strategic Asset Allocation (SAA, long-term target weighting) and Tactical Asset Allocation (TAA, short-term adjustment allowance). However, as stock prices surged, the proportion of domestic stocks in the National Pension Service's assets rose to approximately 21% at the end of March, about 27% on May 26, and about 30% on June 19.

In response, the National Pension Service (NPS) significantly raised its target weight for domestic stocks to 20.8% at a Fund Management Committee meeting on May 28 and increased the permissible range for strategic asset allocation from 3 percentage points to 6 percentage points. This was an exceptional decision, considering that the target weight for domestic stocks had been steadily declining over the past decade. Prior to this, in January, the NPS decided to defer rebalancing until the end of June in the event of exceeding the permissible range for strategic asset allocation, taking into account the high volatility of the domestic stock market. The NPS explains that these measures represent a strategic shift aimed at benefiting future generations by maximizing returns during periods of rising domestic stock prices and supporting the development of the capital market. Indeed, the NPS recorded a 22% return on domestic stocks in the first quarter of this year, and as reserves increased, the projected depletion of the fund was also delayed.

Against this backdrop, the KOSPI continued to rise rapidly, and foreign institutional investors added upward pressure on the exchange rate by selling domestic stocks during the rebalancing process. In a report dated June 15, British investment bank Barclays analyzed that this change in the National Pension Service's investment strategy was, consequently, one of the factors behind the rise in the exchange rate. The implication is that if the National Pension Service had rebalanced according to its original standards, the upward trend in stock prices would have stabilized, and the upward pressure on the exchange rate would have been lowered accordingly. Of course, the causal relationship supporting this claim is not clear, and it must also be considered that various other factors complexly influence the exchange rate. Since July, the won/dollar exchange rate has been falling rapidly, driven by factors such as the listing of SK Hynix's $26.5 billion NASDAQ ADR (American Depositary Receipt, a security issued to allow foreign company stocks to be traded on the U.S. stock market) on July 11 and the Bank of Korea's interest rate hike on July 16.

However, given that the National Pension Service has a duty to promote financial market stability, it needs to heed the criticism that it exacerbated financial market instability, such as rising exchange rates and overheating of the stock market, by unreasonably bending its principles. In fact, as stock prices continued to surge in the first half of the year, the outstanding balance of margin loans (the amount of money borrowed by investors from securities firms to buy stocks that has not yet been repaid) also increased from about 27 trillion won at the beginning of the year to about 37 trillion won in early July, before decreasing thereafter. 

Had the National Pension Service reduced its weighting in domestic stocks during the market surge in the first half of the year, it could have curbed market overheating and leveraged investing to some extent. Furthermore, it might have had the capacity to support stock prices more actively during the sharp decline that began in July. This is why there are calls to strengthen the independence of the National Pension Service and enhance the transparency of its decision-making structure.

The Light and Shadow of Stock Market Rise: For Whom Is the KOSPI Rise?

The stock market serves as a channel for growing the public's valuable assets and raising investment funds for companies, playing a role in facilitating the efficient allocation of financial resources. In this regard, the government's efforts to revitalize the previously undervalued stock market deserve positive evaluation, and in any case, the KOSPI index has risen significantly as intended.

However, it is also worth noting that these gains have been distributed very unequally. Although the number of individual investors is projected to reach approximately 14.46 million by the end of 2025, stock ownership is much more concentrated than income. According to the Korea Securities Depository, as of the end of 2025, the assets of the top 1% of investors holding stocks worth 500 million won or more account for about 60% of the total; in contrast, while investors holding less than 50 million won make up about 83% of the total population, their holdings account for only 9.8% of the total. The holdings of the bottom 60%—approximately 8.74 million people—holding less than 10 million won account for a mere 1.9% of the total. By 2025, the top 10% held 83.7% of total assets, and the top 5% held 74.4%, marking the highest figures since 2021.

Meanwhile, deliberation and discussion are also needed regarding whether this recent rise in stock prices can truly lead to a virtuous cycle of corporate investment, increased income for citizens, and ultimately, economic growth . Since the 1990s, as companies in the United States have focused on short-term profit growth to boost stock prices, industrial investment has stagnated and inequality has worsened. This is a side effect of financialization (a phenomenon in which the financial sector increases its proportion and influence within the overall economy) and the management style known as shareholder capitalism, which places the maximization of shareholder value as the top priority of corporate management. Although stock prices rose, a significant amount of capital flowed out of companies through measures such as share buybacks (an act of increasing per-share value by purchasing, canceling, or holding one's own shares) and increased dividends. In the meantime, wage growth for workers stagnated, and inequality deepened. 

In Japan as well, following Abenomics (an economic stimulus package centered on large-scale quantitative easing promoted by the Shinzo Abe administration in 2012), stock prices rose significantly, but investment was not stimulated and wage growth remained stagnant. Similarly, in Korea, corporate financing through the stock market in the first half of the year amounted to only about 11 trillion won, falling short of even half of the figure for the first half of 2025.

Even if stock prices rise, it would be difficult to invest one's valuable assets in the stock market if volatility is high—like a coin toss where the index rises 5% today and falls 5% tomorrow. Although it is said that young people, despairing over exorbitant real estate prices, flocked to single-stock 2x leverage ETFs despite knowing the risks, it is estimated that the majority of them suffered significant losses. Above all, watching the recent surges and plunges in stock prices, one wonders if the reality of office workers staring at price charts all day and becoming engrossed in stock discussions whenever they gather is diminishing the precious value of labor in life. I am concerned that the excessive emphasis on the stock market weakens the responsibility of society, the community, and the government regarding individual lives, futures, and preparation for retirement, while merely reinforcing the ideology of "survival of the fittest."

When the Lee Jae-myung administration put forward the "KOSPI 5,000" goal as an agenda item after its inauguration, many likely harbored some inward concern. This is because while rising stock prices boost political support, the opposite occurs when volatility increases and prices fall. Indeed, President Lee Jae-myung's approval rating has declined since June. While other factors, such as controversies over prosecution reform and real estate issues, may be at play, the decline in stock prices is likely a contributing factor. Now is the time for the government to do its utmost to ensure the stock market fulfills its proper role, without forgetting the dark side of recent price volatility, before touting stock price increases as an achievement.

(This article was originally published as a column in Social Korea in Korean and translated into English with the help of Google Translate. The views expressed in this article are those of the author(s) and do not necessarily represent the official stance of the center.)