Japan Traders Chafe at ‘Korea Linkage’ as Chip Swings Drown Out Stock-Specific Bets

Short-Term Futures Money Is Driving the Market

Korea and Japan Share Heavy Semiconductor Exposure

Global Investors Are Trading Them as a Pair

Company-Specific Stories in Japan Are Getting Buried

Concern is growing in Japan’s securities industry that the country’s stock market is being swayed too heavily by South Korea in what market participants call a “Korea linkage,” the Nihon Keizai Shimbun reported on August 6.

Sharp swings in chip stocks such as Samsung Electronics Co. and SK Hynix Inc. are spilling into Japanese equities, overshadowing company-specific factors such as earnings and valuations and delaying the return of long-term overseas investors, the newspaper said.

On the Tokyo stock market on August 5, the Nikkei 225 Stock Average rose more than 2,000 yen at one point from the previous day. AI- and semiconductor-related shares including Ibiden Co., which posted strong earnings the day before, as well as Advantest Corp., Fujikura Ltd. and Kioxia Holdings Corp., all jumped and lifted the index.

Even so, market sentiment was not as strong as the size of the rally suggested. A trader at a major Japanese brokerage said overseas long-only investors were instead shifting money into domestic-demand stocks. It was hard to tell who was buying AI-related shares, the trader said. Recent gains have been driven more by short-term money using stock-index futures than by long-term foreign capital.

A key reason overseas investors are hesitating to resume purchases is this “Korea linkage.” Because both the Nikkei and the Kospi have a high weighting of AI and semiconductor stocks, global investors are effectively treating them as a single trade. As a result, when South Korean stocks swing sharply on supply-and-demand factors, Japanese equities have repeatedly moved hard in the same direction.

That pattern reappeared on August 5. As the Kospi trimmed its intraday gains, the Nikkei also lost momentum. In Japan’s brokerage industry, some traders complain that the sharp moves in South Korean stocks are spilling over into Japan, making it harder to base investment decisions on individual companies’ earnings, growth potential and share-price levels.

Hedge funds and institutional investors that were hit by last month’s selloff in AI-related stocks have yet to increase risk exposure. Naohide Une, head of Investment Lab, said the most extreme pessimism had passed, but that it remained difficult to raise holdings quickly while volatility stayed high.

Recent declines have also substantially eased valuation concerns for some AI and chip names, including Tokyo Electron Ltd. and Murata Manufacturing Co. AI investment demand remains strong. But investors say it is difficult to buy aggressively when share prices are being driven more by market flows in South Korea than by corporate earnings.

A stronger yen following joint foreign-exchange intervention by U.S. and Japanese authorities has added to the pressure. The currency’s rise has weakened earnings expectations for exporters such as automakers, while conviction about further upside in AI-related shares remains limited, sapping momentum in Japan’s stock market.

Market participants see overseas buying of Japanese equities resuming in earnest as early as September. Large Japanese and foreign brokerages are set to hold a series of major conferences, inviting global investors to meet with Japanese companies.

BofA Securities plans to hold one such event from August 31 to September 4. More investors are expected to attend than last year, and requests for one-on-one meetings focused on AI-related companies have in some cases risen fourfold from a year earlier, according to the report.

If overseas investors start buying cash equities again after reassessing individual companies’ earnings and growth prospects, the excessive lockstep trading between Japanese and South Korean stocks could also ease. Japan’s securities industry is watching whether the market can break out of this “Korea linkage” and return to fundamentals-driven trading, a shift it sees as key to further gains by year-end.

Choi Man-su, Tokyo correspondent at Hankyung.com, bebop@hankyung.com