TOKYO – Few market visuals are more striking than South Korea’s winner and the Kospi index suddenly breaking in opposite directions.
The acquired has fell 4.5% this year, placing it among Asia’s weakest currencies. Kospi, meanwhile, has exploded – up to 85% since January 1 and 200% over the past year. The force driving Seoul’s stocks to record highs is rooted in artificial intelligence craze. Tech giants SK Hynix, up to 873% in twelve months, and Samsung Electronics, until 447%, are doing most of the heavy lifting.
The stock surge has given President Lee Jae-Myung an almost magical aura of the market. During the campaign before taking office in June 2025, he pledged to raise the Kospi to 5,000 – a target that meant doubling the index during his five-year term. Instead, it passed 8,000 in less than a year (currently it is at 7,815).
However, the profit slide is undermining Lee’s market triumph. Since mid-2025, the currency has steadily fallen lower, even as stocks rose. Its fall is much gentler than The rise of Kospisbut the gain is now hovering near levels last seen during the 2009 global financial crisis as the fallout from the war in Iran reverberates across Asia.
“The weakness in the won is an important data point since Korea doesn’t have any fiscal problems,” said Brad Setser, an economist at the Council on Foreign Relations. “It also doesn’t suffer from any foreign exchange shortages – so creative policy makers should be able to create a stronger gain.”
This is easier said than done, of course. Setser says the giant National Pension System of Korea should stop accumulating foreign assets. Effectively, this means selling dollars to earn. Meanwhile, the US should be ready to join the BOK in directly supporting earnings. After all, Setser says, it’s “time to be creative.”
The problem, notes economist Paul Cavey, founder of the consultancy The East Asian Economyis that “foreigners became big sellers of domestic assets” in recent weeks. Net sales of Kospi shares by foreign investors so far this year reached 62 billion dollars. Part of the concern is that AI made it too easy for President Lee’s team – and that the market is too frothy for comfort.
Earlier this month, Citigroup analysts raised the specter of “irrational exuberanceThe reference here is a phrase made famous by then-Federal Reserve Chairman Alan Greenspan in 1996.
“Although we believe it is too early for a sharp market correction or the end of the bull market due to the tightening of financial conditions caused by interest rate factors, the Kospi appears significantly overbought relative to the US market,” writes Citi. “A prudent approach would be to take advantage of half the positions.”
A major concern is that Lee has yet to address the long “Korean descent” that keeps him local the shares at a lower price than the world ones. It’s also why MSCI continues to withhold developed market status — an upgrade that would unleash a flood of foreign capital into value-earning assets.
MSCI has pressured Korea to remove outdated rules, ease ownership limits, deepen capital markets, extend currency trading hours and increase transparency. Seoul has made some progress. Lawmakers return to office short sales in March 2025 after a 17-month ban. Authorities have extended foreign exchange trading to 17 hours.
However MSCI maintains that Korea is not yet ready for global prime time. In June 2025, when it again rejected Korea’s request for an upgrade, MSCI said: “Despite these reforms, investors believe it remains essential to assess whether the measures implemented are sufficient, given that developed markets typically have fully convertible currencies with active, unrestricted offshore and onshore markets.”
To be sure, Korea saw it recently weight in the MSCI Emerging Markets Index rises to 21.7% from 15.4%. This puts Korea in league with China’s share of 22%.
However, the Korean market is being challenged on both sides amid domestic rigidity and global headwinds.
At the international level, rising US dollar is adding to the pressure, draining capital from emerging markets and raising the risk of accelerated exits from Korea. It also increases the country’s exposure to high energy costs. With unrest in the Middle East keeping oil in the $100-a-barrel range, the shock poses a direct threat to Asia’s fourth-largest economy.
In March, Korea imposed nationwide fuel price caps for the first time in nearly three decades. However, inflation accelerated. Consumer prices rose 2.6% in April from a year earlier, the fastest pace in nearly two years, and up from 2.2% in March. That leaves the Bank of Korea in a bind — and increases the chances that new governor Shin Hyun-song will soon opt for a rate hike.
BOK has keep rates stable from May 2025, after delivering four 25 basis point cuts in the previous seven months. The last time the BOK tightened was in January 2023. At that time, the central bank raised rates to 3.5%, the highest since 2008. Although the BOK meets on May 28, it is not expected to start raising its benchmark of 2.5% until the second half of 2026.
The longer the Strait of Hormuz remains closed, the more Korea’s outlook for 2026 unravels—and the more vulnerable it is. The AI-driven economy is done As inflation drives bond markets into turmoil, the risk increases that capital will be drawn away from AI, data centers and cloud infrastructure.
Korea could become ground zero for a new clash between the “old economy” – rising commodity prices and other traditional pressures – and the “new economy” that AI is building in real time.
Earlier this month, BOK Deputy Governor Ryoo Sang-dai warned that it may be “time to consider holding off on rate cuts and think about hikes” as inflation heats up. Economist Kong Dong-rak of Daishin Securities notes that, compared to the last policy meeting — when officials adopted a wait-and-see stance amid uncertainty over the impact of the war — the BOK’s latest comments mark “a step forward” toward prioritizing inflation.
This is not to dismiss Korea’s potential. Betting against him has not been a winning strategy in recent decades. Korea is, after all, an economy that can take a punch.
After the 1997-98 Asian financial crisis, Korea was the first battered economy to turn around. A decade later, she overlooked “Comrade Lehman” in ways hedge funds never predicted. And in 2009, despite market speculation, Korea did not “The future Iceland” at all.
Korea sailed through the Federal Reserve 2013 “conical ragewhich rocked emerging markets around the world. This is also about the 2017-2021 Trump era trade war. In 2020, Korea became an example of Covid-19 with extremely low infection rates. And by 2021, the BOK was the first 12th central bank to tighten policy.
More recently, President Lee steered Korea through the turmoil of the 2025 Trump 2.0 trade war with surprising resilience. And today, Kospi is reaching an all-time high despite US tariffs and the ongoing US-Israel conflict in Iran.
The challenge is that Korea excels in economic defense but struggles to play offensively. In the second half of 2026, it will need both capabilities.
Lee also needs to convince the world that Korea has not lost its innovative edge. It was once at the center of the tech universe when success meant shiny smartphones. Today, the bar is much higher. It’s not just about high-end production AI chips but also inventing the next wave of game-changing technologies that put Korea at the heart of global disruption.
And in a nascent arms race across Asia, strengthening Korea’s competitiveness may be more important than ever. Korea’s biggest structural problem is its sprawling family-owned conglomerates, or chaebols, which dominate the economy and rob young startups of the resources they need to thrive. In such top-down systems, real disruption usually occurs only after a company reaches a significant size.
last month, Lee urged Korea Inc. to move quickly to market. “With free trade weakening and geopolitical risks rising, the global trade order is at an inflection point,” he said. “A manufacturing-dependent country like ours must pursue bold and transformative innovation—our future depends on it.”
Easier said than done. To stay ahead of the global pack, Team Lee must stimulate Korea to raise its R&D game, building ecosystems and fostering a risk-taking culture that puts Korea at the center of shaping—not just riding—the AI wave.
Lee’s 351-day administration is clearly on a roll. In his watch, Kospi has grown beyond everyone’s wildest expectations. Powered by AI, of Korea market cap it has since surpassed France, Germany and Great Britain. However, the lackluster earnings suggest Korea may not be as ready for global prime time as the bulls think.
