A financial shock driven by high interest rates is becoming reality, with the KOSPI plunging more than 5% as government bond yields surge across major economies. The benchmark index closed at 6,471 on the 19th, down 5.8% from the previous day. A sell-side sidecar was briefly triggered during the session. Stock markets in other major economies also fell, with Japan's Nikkei dropping 3.16% the same day. Fears that entrenched high rates worldwide could add to corporate funding burdens froze investor sentiment. The greater concern is that expanding fiscal spending and rising bond issuance in the United States, Japan and other major economies, combined with persistent inflationary pressure, could set off a bond-market convulsion.
The 30-year U.S. Treasury yield and Japan's 10-year government bond yield have each reached their highest levels in 19 and 30 years, respectively. South Korea's 30-year bond yield also climbed to 4.751%, its highest in 14 years. For companies that must invest astronomical sums in advanced industries such as semiconductors, artificial intelligence and robotics, high rates could derail future investment plans. Corporate bond issuance fell 10.1% in the first half of this year to 67 trillion won, down from about 75 trillion won in the same period last year, a clear sign that raising funds has become difficult.
High rates also strike directly at household debt, which is snowballing. According to the Bank of Korea, household credit stood at 2,019 trillion won ($1.45 trillion) at the end of June, up about 26 trillion won from the end of March. The jump reflects a surge in stretching finances to the limit to buy homes and in buying stocks with borrowed money. If a rising-rate trend takes hold in these conditions, a pullback in consumption from heavier interest burdens is inevitable. A 0.25 percentage point increase in the Bank of Korea's base rate would saddle households with an additional 3.2 trillion won in costs.
High rates threaten the growth engine of the Korean economy by slowing consumption and dampening investment. The government should not be intoxicated by upward revisions to growth forecasts riding on a semiconductor boom, but instead draw up a careful, comprehensive policy package covering both households and businesses in preparation for prolonged high rates. It needs to screen and manage lending, distinguishing owner-occupier demand for home purchases from speculative borrowing. It should also move quickly to boldly weed out unviable companies and concentrate support on firms with future growth potential. Above all, it is advisable to hold back on expansionary fiscal spending, as it raises pressure on prices and rates. Now is the time to build a breakwater against high rates, layer upon layer, leaving no gaps.
