KOSPI Recovers 8,000 Mark Amid Rising Inflation and Currency Worries

The KOSPI index has surpassed the 8,000-point mark, but factors of inflation and exchange rate instability have emerged as new variables for the economy. On the 22nd, the Korean Won's value fell below 1,520 per dollar, marking a 4.45% depreciation (fall in Won value) compared to the end of last year. This depreciation of the Won can increase the burden of rising import prices, potentially leading to interest rate hikes.

Increased demand for dollars, stemming from factors like the Iran conflict and foreign stock sell-offs, is identified as a direct cause of currency instability. The United States is driving dollar demand through investments in big tech AI, tax cuts and fiscal expansion policies, and a defense budget request of $1.5 trillion. Major economies such as China, Japan, and Europe are also increasing fiscal spending for escaping deflation, stimulating their economies, increasing defense outlays, and investing in infrastructure.

Presidential policy advisor Kim Yong-beom diagnosed these phenomena of high interest rates, high inflation, and high exchange rates as 'the cost of success' and 'friction of progress,' interpreting them as part of a leap forward rather than a crisis.

South Korea's 10-year government bond yield surged by over 20% from 3.385% at the end of last year to 4.064% on the 22nd, becoming a factor of market instability. As of the 26th, foreign investors' net selling of KOSPI stocks since the beginning of the year amounts to 96.4 trillion won. Currency instability is emerging as a market destabilizer, showing a steeper rise compared to major advanced economies; it has driven the yield on South Korea's 10-year government bonds up by over 20%, from 3.385% at the end of last year to 4.064% on the 22nd.

Despite net selling by foreign investors, the attractiveness of the South Korean stock market remains high. South Korean companies' profit outlook is robust, and interest rates are lower than in the United States. South Korea's KOSPI forward price-to-earnings ratio (PER) is around 8-9 times. For exporting companies, a rising dollar/won exchange rate is not necessarily an unfavorable environment.

In April, the Bank of Korea estimated the Korean Won's sensitivity to capital outflow shocks at 0.65. This figure is higher than that of the Japanese Yen (0.38) and close to the average for emerging markets (0.71). A shallow foreign exchange market structure leads to heightened exchange rate volatility, reacting sensitively even to minor shocks.