South Korea’s Japan-Inspired Measures to Boost Stock Market

The Korea discount can also be attributed in part to the chaebols, since minority stakeholders have limited influence over strategic choices in these largely family-owned systems

Japan’s stock market finally picks up after 34 years, hence South Korea is hoping for the same boom for their own stock market. After a series of savvy corporate governance reforms the companies got to buy back their shares. South Korea hopes to mirror Japan’s efforts to boost the value of its companies as the neighbor’s stock surges to higher records. 

With these measures Seoul hopes to narrow a discount on stock prices. Seoul is implementing changes to combat the “Korea discount” that are dragging down the valuation of the firms. South Korea has been dealing with this vexing matter where the companies are undervalued compared to their global peers due to low dividend payouts and the influence of conglomerates known as chaebols.  

The Korea discount can also be attributed in part to the chaebols, since minority stakeholders have limited influence over strategic choices in these largely family-owned systems.

The dominance of family-run conglomerates, poor corporate governance, poor returns and the tensions with North Korea has been the sole reason for the “Korea discount”, name given to the low valuations of the big companies in Asia’s fourth largest economy. 

According to the Financial Investment Association, Korea’s stock market capitalization in 2022 to 2023 rose to 23.1%. Where the foreign investors take up nearly one-third of the shareholders. The number of shareholders in Korea tripled to almost 14.5 million in six years, from 2016 to 2022 as per the Korea Capital Market Institute. 

According to the US investment bank Goldman Sachs, the stocks of one of the K-pop management agencies are being undervalued by 85-137%. 

“Korean stocks tend to be undervalued compared to their peers even when businesses are very similar,” James Lim, a senior analyst for the Asia equity research team at Dalton Investments.

The government decided to banish the “Korea discount” all at once after years of low unimaginable returns in the local stock market. To encourage the companies to share more of their profits with the shareholders, the officials have announced the launch of the Corporate Value-up Program. As a result, the shareholders’ returns are a big reason behind the discount. Additionally Korea has been limited with their dividends, paying out least in the region. 

The introduction of the measures highlight better-performing firms and also include tax benefits to increase shareholders to boost their returns and capital efficiency. The action is mostly perceived as a ripoff of neighboring Japan, whose regulatory changes are credited with pushing the Nikkei 225 to all-time highs following decades of stagnation. 

The previous efforts made to uplift stock valuations did not work in their favor. However, they expect better outcomes this time and hope for things to be different. While being motivated by Japan’s recent success, which has attracted investor’s attention due to the noticeable shift towards greater capital efficiency. Besides, the new generations of Chaebols are more progressive and adaptive. A great deal of fresh interest in the stock market has resulted from the pandemic’s spike in retail investor activity, which may help the nation’s value-up reforms.

An analyst from HSBC estimates that if the country’s big companies give up even half the valuations of their Taiwanese peers, they will see a share price boost of at least 25%. 

Trying to match the footsteps of Japan in order to boost the South Korean stock market could be a challenge for the country. On the day of the announcement of the new program, the benchmark Kospi index dropped by 0.77% causing heat towards the idea. Some critics said the proposals were vague, relied on voluntary participation, and failed to address the underlying issue that led to the “Korea discount”, such as high inheritance taxes that incentivized chaebol owners to maintain low share prices.