Elderly selling insurance to invest in stocks, record-high leverage! Signs of a stock market bubble are appearing frequently in South Korea, and the central bank is starting to closely monitor leverage.

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The Korean stock market has seen an epic surge driven by the AI semiconductor boom, but as margin balances soar to historic highs and retail speculative sentiment spreads, signs of market bubbles are appearing frequently.

Margin balances in the Korean stock market have skyrocketed to a record 38 trillion won, rising sharply from 25 trillion won in just a few weeks since the end of April. Even more noteworthy, the elderly group aged 60 and above now accounts for nearly one-third of total margin balances. According to reports, many elderly investors have even sold life insurance at a loss to invest those funds into stock accounts. Bloomberg quotes analysts noting that valuations are clearly elevated, with the market driven more by sentiment than by fundamentals.

The highest economic and financial decision-making level in Korea—including the central bank itself—has pledged to strengthen supervision of margin lending businesses, proactively compressing leverage accumulation before the market fully recognizes the risks.

Additionally, last week the Bank of Korea held its first monetary policy committee meeting since Shin Hyun-song took office as governor, sending "hawkish signals." This could pose a potential threat to the Korean stock market.

Though the central bank's rate remained unchanged at 2.50% last week, the tone was clearly hawkish. Two out of seven committee members voted for an immediate 25 basis point hike; Shin himself said, “Even if we raised rates at this meeting, there would be plenty of convincing reasons,” and stressed that “the policy direction is already clear from perspectives of price, growth, exchange rate or real estate. The only suspense is when, at what pace, and by how much rates will be raised.” Institutions like Morgan Stanley expect the Bank of Korea to hike rates by 25 basis points each in July and October this year, and raise rates twice more in the first half of next year, bringing the policy rate to 3.50%.

However, analysts point out that the structural bull logic remains intact; Samsung Electronics and SK Hynix's core positions in global AI infrastructure construction remain strong. In the short term, however, risks will significantly increase over the next 60 to 90 days; once rate hike expectations materialize, a 15% to 20% pullback may become a more ideal entry point rather than an exit.

Leverage Surge and Retail Sentiment: Structural Features of the Bubble

This round in the Korean stock market has shifted from being fundamentally driven to leverage-driven. Korea’s iShares MSCI ETF (EWY) has gained over 300% since the low point on April 8, 2025—then, amid the Trump administration’s tariff shocks; over the same period, the Korea Composite Stock Price Index (KOSPI) is up 248%, leading the 92 global stock markets tracked by Bloomberg.

The expansion rate of margin balances stands out. In less than two months since the end of April, margin balances jumped from 25 trillion won to a record 38 trillion won. While margin debt in Korea remains moderate compared globally, the structural issues behind this number are worth greater attention.

The participation method of the elderly group in particular worries the market. Investors aged 60 and above currently hold nearly a third of margin balances; some elderly, according to reports, have even cashed out their life insurance at a loss to gather funds for stock investments—this, in itself, is a microcosm of extreme market sentiments. Shin’s own research has warned that mark-to-market leverage unwinds much faster than it accumulates, and shocks often hit the most vulnerable holders first.

The Governor’s Core Creed: Act Before the Bubble Forms

Shin Hyun-song’s inclination toward rate hikes is not market misreading but a natural extension of his academic research. The new governor is academically rooted, having long led research at the Bank for International Settlements (BIS); his knowledge framework was shaped by post-global financial crisis macro-finance scholarship, which views the driving forces of financial crises as leverage cycles, liquidity spirals, and risk-bearing channels—just as critical as traditional economic cycles.

The paper “Liquidity and Leverage,” co-authored by Shin and Tobias Adrian, is considered a foundational work in the field. The paper shows how mark-to-market balance sheets turn rising asset prices into pro-cyclical leverage and create intense feedback loops when reversed. The framework’s core proposition is: The best timing for intervention is before leverage normalizes, not after.

Recent economic data has further provided ammunition for Shin’s hawkish stance. Korea’s workday-adjusted exports in May soared year-over-year by 60.7%, unadjusted by 53.2%—the strongest growth since 1984. Semiconductor exports surged a record 169.4%; the trade surplus expanded to $26.9 billion.

1989 Japan’s Mirror: What’s Different This Time, What’s Strikingly Similar

The comparison between Korea’s current market and Japan’s 1989 bubble is already widespread. At the time, Japan’s stock and real estate markets both boomed, margin speculation was rampant, and as the economy appeared strong on the surface, the Bank of Japan began raising rates—leading to one of the most brutal asset bubble collapses in modern market history. Rate hikes targeting speculation not only cooled markets but destabilized the entire foundation, causing the bedrock to collapse.

Analysts suggest Shin’s own academic intuition may lead him to repeat the Bank of Japan’s misstep in 1989—viewing market prosperity as a “nail” to be hammered down by rate hikes. If such rate hikes trigger the margin spiral warned about in his research, consequences could far exceed mere market cooling.

However, Korea is not Japan in 1989. Its export-driven AI industry engine is more vibrant; Samsung’s dominance in high-bandwidth memory (HBM), SK Hynix’s position in the AI capital expenditure cycle, and Korea’s strategic role in the broader AI supply chain all provide solid fundamental support for the long term. Capital expenditures by hyperscale cloud providers are ongoing, and the core AI trading logic remains intact.

The key question is: Can Shin precisely remove the fuel before the market self-ignites, without triggering the margin spiral his own research warns against? Analysts believe that once the smoke clears, quality surviving assets will be worth holding—but before then, investors may need to endure some turbulence.

Risk Warning and DisclaimerMarkets entail risks, and investing requires caution. This article does not constitute individual investment advice, nor has it considered the specific investment objectives, financial situations, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article fit their specific circumstances. Investing based on this article is at your own risk. ```