A New Chapter in History for the Korean Stock Market
On September 12, 2025, the Korea Composite Stock Price Index (KOSPI) wrote a new chapter in its history. Closing at 3,395.54 and briefly flirting with the 3,400 mark during the day, the market’s fiery rally was more than just a number—it was a powerful signal that a paradigm shift is underway in South Korea’s capital market. After years of being trapped in a narrow range, earning the infamous “Box-pi” moniker, how did the Korean stock market muster such powerful energy to continue its record-breaking rally?
Most experts agree that the primary engine behind this extraordinary ascent is the “new government’s policies.” The administration’s clear policy direction, which has consistently championed the advancement of capital markets since its inauguration, has created a powerful synergy with favorable global economic winds. This post will conduct a deep dive into the new government’s policies that have acted as the core driver of the recent rally, explore how they connect to resolving the chronic “Korea Discount,” and offer a detailed outlook on the market’s future.
The Two Keys That Awakened a Dormant Market: Tax Relief and the Value-up Program
The significance of this rally lies in its breadth and leadership. It is not a surge confined to specific theme stocks or sectors but a systematic, broad-based rally led by the market’s “smart money”—foreign and institutional investors. The decisive factors that completely transformed their investment sentiment were two key policies wielded by the new government: the easing of the capital gains tax and the Corporate Value-up Program.
1. Calming the ‘December Fear’: Easing the Major Shareholder Capital Gains Tax
Every year, as December approached, the Korean stock market was haunted by a seasonal scourge: a “tax-avoidance sell-off.” This was driven by large individual investors, known as “big hands,” who would dump their holdings to avoid being designated as a “major shareholder” and thus being subject to capital gains tax. Under current law, an investor holding more than 5 billion KRW in a single stock is designated a major shareholder and must pay a hefty 20-30% tax on any capital gains from the following year’s sales.
The problem was that the previous administration had planned to drastically tighten this rule, lowering the threshold from 5 billion KRW to just 1 billion KRW. While justified as a “tax on the rich,” the market viewed this as a major shackle that encouraged capital flight and suppressed liquidity. Anxiety grew as not only the ultra-wealthy but also middle-class investors who had seen their assets grow through long-term investment could potentially become subject to the tax. The resulting year-end sell-off by major shareholders became a chronic illness that distorted market supply and demand, repeatedly capping any potential for a year-end rally.
However, the new government provided a clear answer to the market’s concerns. Since taking office, it has consistently signaled its intention to ease this standard, and recent anticipation that President Lee Jae-myung would officially confirm the decision to maintain the current 5 billion KRW threshold sent a wave of relief through the market.
This was more than a simple tax adjustment; it was a psychological turning point. It sent a powerful signal that the government respects investors’ property rights and is committed to a predictable tax policy. With the single greatest uncertainty of year-end supply instability removed, major investors could confidently keep their funds in the market. Witnessing this, foreign and institutional investors, now trusting in the fundamental improvement of the Korean market, began an aggressive “Buy Korea” campaign. Ultimately, the easing of the capital gains tax standard was the decisive measure that cleared the market’s arteries, lighting the fuse for this historic rally.
2. A Frontal Assault on the ‘Korea Discount’: The Corporate Value-up Program
“Even with the same earnings, a Korean company’s stock is worth only half of its global peers.” This statement captures the reality of the “Korea Discount,” the chronic undervaluation that has long plagued the Korean stock market. Opaque corporate governance, meager shareholder returns, and convoluted ownership structures benefiting only founding families have consistently suppressed the true value of Korean companies. No matter how profitable a company was, investors stayed away because the fruits of that success were not properly shared with ordinary shareholders.
To solve this deep-rooted problem, the new government unsheathed its sword: the “Corporate Value-up Program.” Benchmarked against the successful policies that revived the Japanese stock market, its core mission is to incentivize companies to voluntarily increase their corporate value and share the rewards with their shareholders.
The specific components of the program include:
- Encouraging Disclosure of Value Enhancement Plans: It urges all listed companies to regularly analyze key investment metrics like Price-to-Book Ratio (PBR) and Return on Equity (ROE), and to establish and communicate mid-to-long-term plans to improve them. For example, a company with a PBR below 1x is encouraged to diagnose why its stock price is below its book value and present concrete improvement plans to investors, such as dividend hikes, share buybacks, or strategic investments.
- Providing Active Incentives: This is not merely a pressure tactic. The government has pledged tangible tax and administrative benefits, such as corporate tax credits and advantages in government contracts, to companies that actively engage in enhancing their corporate value, thereby encouraging voluntary participation.
- Developing a ‘Korea Value-up Index’ and Related ETFs: A new stock index will be created, comprising companies exemplary in their shareholder return efforts and corporate governance. The government will support the launch of financial products, such as ETFs, that track this index. This creates a clear pathway for pension funds and other institutional investors to channel capital into high-quality, undervalued companies, fostering a virtuous cycle where market funds naturally flow toward “good companies.”
The Corporate Value-up Program is not a short-term stimulus package. It is a long-term project aimed at fundamentally transforming the management paradigm of Korean companies from a focus on “revenue and profit” to one centered on “shareholder value.” Only when a culture takes root where companies recognize shareholders as partners in management and share the profits they earn can the Korea Discount truly be relegated to history. The recent intensive buying of low-PBR stocks by foreign investors is clear evidence that they are betting on the potential of this very change.
Favorable Tailwinds from Abroad: Global Liquidity and the Semiconductor Supercycle
If the new government’s policy efforts were the “domestic affairs” that strengthened the market’s constitution, the favorable global economic winds that arrived at the same time were the “foreign affairs” that gave wings to the rally.
With U.S. labor data coming in weaker than expected, anticipation for a “pivot” from the U.S. Federal Reserve—shifting from maintaining high interest rates to fight inflation to cutting them—reached a crescendo. When the strong dollar trend reverses and global liquidity increases, capital naturally flows to emerging markets in search of higher returns. Among them, South Korea has emerged as one of the most attractive destinations, thanks to the combination of its solid fundamentals and the government’s strong commitment to boosting its stock market.
Adding fuel to the fire was the revival of the semiconductor industry, the backbone of the Korean economy and home to the KOSPI’s “king stocks.” After a long downturn, the sector has entered a full-fledged recovery. The explosion in demand for High-Bandwidth Memory (HBM) driven by the AI revolution, coupled with a rebound in traditional memory chip prices, has led to continuous upward revisions of earnings forecasts for Samsung Electronics and SK Hynix. The rise of these two heavyweights not only lifts the entire index but also spreads a warm glow to related materials, components, and equipment companies, injecting powerful vitality across the entire market.
A New Beginning, But Not Without Caution
So, what should we prepare for as we stand on the threshold of the KOSPI 3,400 era? It is clear that the Korean stock market has entered a new phase, distinct from its past. Restored faith in government policy, corporate efforts toward structural improvement, and the revival of the semiconductor cycle provide ample fuel for further market gains.
However, even amid this rosy outlook, we must not overlook the potential risks. The global financial market could be shaken at any time if the U.S. rate cuts are delayed longer than expected or if unforeseen geopolitical events occur. Furthermore, the possibility that the ambitious Corporate Value-up Program could end up as a “paper tiger” due to passive corporate participation cannot be entirely dismissed. We must also be mindful that profit-taking from the recent sharp rise could emerge at any moment.
Therefore, now is not the time for blind, impulsive buying. It is a time to understand the essence of the ongoing changes and to build a long-term investment strategy. Investors need the wisdom to sift the gems from the stones by carefully monitoring whether the government’s policies are consistently implemented and whether corporations are taking concrete actions to enhance shareholder returns and improve governance.
In conclusion, the recent market rally is the precious outcome of clear policy signals from a new government breaking the old shackles of the Korea Discount, amplified by a favorable external environment. This is more than just a rise in stock prices; it is a critical inflection point in the maturation of South Korea’s capital market. Instead of reacting to daily index fluctuations, it is time to look at the market with a long-term perspective, focusing on the positive changes that are strengthening our market’s fundamental constitution. KOSPI 3,400 is not the end, but a milestone heralding the beginning of a new era.