Money-Move Policy Inflated Stocks Alone, Breaking Rate-Currency-Capital Balance

Stock market volatility has expanded sharply because the government's money-move policy has been carried out simply as a way to supply liquidity to the stock market. Through raising the National Pension Service's domestic equity weighting, deferring rebalancing, and allowing single-stock leverage products for Samsung Electronics and SK hynix, excessive funds flowed into the stock market relative to its size. In particular, as the National Pension Service's equity rebalancing has been delayed, it has conversely produced growing upward pressure on interest rates in the bond market.

In the stock market alone, out of 125 trading days this year, the KOSPI closed up or down more than 3 percent on 41 trading days. That means volatility exceeding 3 percent appeared on roughly one out of every three days. During the single month of June, the index moved more than 3 percent on 11 of 21 trading days. In 2024 and 2025, the number of days it moved more than 3 percent was only four and nine, respectively. Extreme volatility of more than 5 percent this year also occurred on as many as 25 trading days.

As massive liquidity was released into the stock market, an environment was created in which foreign investors could realize profits at will. This year, foreign investors net sold 151.894 trillion won on the KOSPI market alone. In dollar terms, that amounts to about $100 billion (based on a won-dollar exchange rate of 1,500 won), equivalent to 23.6 percent of foreign reserves at the end of June ($427.4 billion). This is six to seven times more than in the first half of 2008 (22.929 trillion won) during the global financial crisis and in the first half of 2020 (21.457 trillion won) when the COVID-19 pandemic crisis peaked.

The large-scale foreign selling is fueling not only won weakness but also exchange-rate volatility. According to the Bank of Korea's Financial Stability Report, the average day-on-day change in the won-dollar exchange rate in the second quarter this year was 0.55 percent, continuing at a high level after 0.60 percent in the first quarter. It had stayed at 0.32 to 0.38 percent throughout 2024, but has risen sharply since the second quarter of 2025 (0.61 percent), when the stock market rally began in earnest.

Analysts say recent interest-rate uncertainty is also affecting the market. This is because it remains difficult to gauge how fast and to what level the Bank of Korea will raise its base rate.

External uncertainty is also unusual. Amid concerns over expansionary fiscal policy under the cabinet of Sanae Takaichi, Japan's 10-year yield exceeded 2.8 percent, marking the highest level since 1996. The value of the yen also fell to its lowest in 40 years, and there are even observations that the yen-dollar exchange rate could exceed 200 yen in the worst case. Amid the fallout from the super-weak yen, the values of Asian emerging-market currencies have plunged in unison this year — the Indonesian rupiah (7.34 percent), the Indian rupee (6.27 percent), the Thai baht (5.82 percent), and the Philippine peso (4.50 percent) — stirring the trauma of the 1997 foreign exchange crisis.

Yoo Hye-mi, a professor in the Department of Economics and Finance at Hanyang University, pointed out, "The stock market policy the government is currently pursuing is a policy that gathers liquidity, not a policy that leads to corporate investment."