Decoupling and South Korea’s new capitalism

South Korea’s economic performance appears to be decoupling from that of the United States. While economic growth in 2025 was around 1%—less than half that of the US—and far short of the global average of 3.3%—its stock market soared by 75%, compared to 18% growth for the S&P 500 (and well ahead of 26% and 27% growth for Japan’s Nikkei Index and the Taiwan Stock Exchange, respectively).

The economic slowdown is not surprising. Like Japan before it, South Korea is confronting rapid population aging and the hollowing out of its industry, as investment is increasingly channeled overseas. Rising inequality and growing financialisation are exacerbating the problem.

The surprise is that equity prices are skyrocketing despite anemic economic growth, as President Lee Jae-myung promised they would when he took power last May. At that time, the benchmark Korea Composite Stock Price Index (KOSPI) stood at about 2,600. Against all odds (and critics’ expectations), it reached Lee’s goal of 5,000 within a year.

To be sure, this achievement was driven partly by an initiative that preceded Lee. The Corporate Value-Up Program, modelled after a successful Japanese campaign, had been working to boost Korean companies’ valuation by enhancing their capital efficiency since its launch in February 2024.

Once Lee took power, this effort went into overdrive. For starters, last July, the Korean Commercial Code was amended to stipulate that directors have a duty to protect shareholders’ interests. It was further amended the following month to require cumulative voting for large companies to protect minority shareholders.

A third amendment, adopted in February, mandates that listed companies liquidate newly acquired treasury shares within one year, and existing holdings within 1.5 years. Such actions created the conditions for increased shareholder returns—a notable change from the era when low dividends held down valuations.

Shifting global trade dynamics also helped, as listed South Korean companies benefited from higher demand for manufactured goods that could act as substitutes for Chinese goods. The AI investment boom—and associated demand for advanced microchips—in the US and elsewhere also gave Korean firms a powerful boost.

These trends help to explain why the operating profits of the 714 KOSPI-listed firms rose by over 25% in 2025, reaching ₩244.8 trillion ($A231 billion), and their aggregated net profit surged by over 33%, to ₩189.4 trillion. The gains are expected to be even larger this year, with operating profits reaching ₩562 trillion and net profits rising to ₩435 trillion—about a 130% increase. This reflects a price-to-earnings ratio of 22, compared to a historical average of 10-12.

Yet another contributor to South Korea’s strong stock-market performance is the rise of retail investors. In 2018, fewer than six million South Koreans—11.5% of the population—invested in stocks. Today, that figure stands at some 15 million, or more than 27% of the population. Excluding the economically inactive population, the share is nearly 50%

The largest increase can be seen among young people. Today, 4.5 million South Koreans aged 20-40 are invested in the stock market, compared to about 1.5 million less than a decade ago (2019). While the average senior investor has much larger holdings, young people’s appetite for investment is growing rapidly. Having spent years watching prices, particularly of real estate, rise far faster than their incomes, they are looking for a way to improve their prospects, and a rapidly growing stock market offers an ideal solution. Individual investors now own close to 60% of stocks in South Korea, compared to about 25% in the early 2000s.

But South Korean investors are not pouring their money exclusively into domestic firms. Many, particularly young people, are instead purchasing American stocks, from which they expect higher returns. South Koreans’ investment in offshore stocks and other securities has more than doubled over the past two years.

At the start of this year, South Korean investors owned $1.78 trillion of foreign stock, with individual investors’ holdings totaling $294 billion at the end of 2025, up from $196 billion a year earlier. Retail investors’ holdings are concentrated in the “Magnificent 7” tech stocks—South Koreans owned 1.6-2% of Tesla’s total outstanding shares (worth $25–28 billion) last year—and in high-leverage exchange-traded funds.

These investments have contributed to another decoupling between the current-account balance and the won’s value. Despite large trade surpluses, the currency has depreciated against the dollar substantially since 2021, from about ₩1,120 to ₩1,500.

While this largely reflects interest-rate and growth differentials, South Korean residents’ massive overseas securities investments have also made a difference. At $181 billion in January–November 2025, these investments exceeded the current-account surplus of $142 billion, which explains the won’s continued depreciation, even as the dollar has weakened against most others.

These developments imply a fundamental change in the nature of South Korean capitalism. The foreign investor-based system that emerged after the 1997 Asian Financial Crisis—supplanting the domestic corporate-shareholder-based system that previously prevailed—has now been replaced by a system dominated by individual investors. Whereas the old corporate-shareholder-based model emphasised the reinvestment of profits to support the company’s continued growth, the new one encourages the delivery of short-term shareholder benefits like dividends.

This should directly boost domestic consumption, which has long been weak, especially compared to Korea’s strong corporate performance. It should also increase the appeal of domestic investment—a goal that tax incentives can further advance—thereby curbing currency depreciation and mitigating the increase in living costs caused by rising import prices. While the growth headwinds Korea faces remain strong, increased domestic consumption and investment can only improve its prospects.

Keun Lee, a former vice chair of the National Economic Advisory Council for the President of South Korea, is Professor of Economics at Seoul National University and the author, most recently, of Innovation-Development Detours for Latecomers: Managing Global-Local Interfaces in the De-Globalization Era (Cambridge University Press, 2024).