Why Korea’s market transformation may be broader than the AI boom—and why the real test has only begun.
As I watched the Korean stock market drift lower through much of 2024, one concern kept returning to me.
South Korea’s population have peaked in 2020 and begun declining. Could an aging, shrinking economy ever command a meaningfully higher valuation in the stock market?
Having observing in Korea for years, I did not view that as an abstract demographic question. I watched the market with genuine concern.
So I began looking at Japan, which had entered population decline well before Korea. What I found was not what I expected.
Japan’s population peaked in 2008 and has declined continuously since 2011. Yet as that demographic contraction became structurally entrenched, Japanese equities were entering one of the strongest advances in their modern history. From 10,395.18 at the end of 2012, the Nikkei 225 reached 64,325.64 on September 2, 2026—more than sixfold.
Population decline did not cause that rally. Japan also benefited at different times from stronger corporate earnings, a weaker yen, monetary stimulus, foreign buying and, later, the global technology cycle.
But the result still overturned my initial assumption. A shrinking population had not condemned the stock market to permanent decline.
That made me wonder what had changed inside corporate Japan.
Japanese companies had once been criticised for low returns on equity, excess cash, cross-shareholdings and conservative payouts. Over time, that behaviour began to change—and so did their valuation.
Then I began seeing some of the same pressures emerge in Korea. Shareholder returns rose. Buybacks and cancellations accelerated. Minority-shareholder protection strengthened. Low-PBR companies faced greater scrutiny, while treasury-share practices and duplicate listings came under direct regulatory pressure.
And another force arrived at almost exactly the same time: the AI infrastructure boom began generating extraordinary profits for Samsung Electronics and SK Hynix.
That left me with a different question.
Is Korea simply enjoying an AI-led earnings boom—or are two powerful forces now converging: an earnings cycle strong enough to lift profits and a structural reform cycle capable of lifting the valuation investors are willing to pay?
To answer that, I went back to Japan.
Japan Was Once Full of Low-PBR Companies Too
Present-day Japan can create a misleading impression.
After years of rising share prices and governance reform, it is easy to imagine that Japanese companies always managed capital more efficiently than Korean companies. They did not.
As recently as July 2022, half of the companies in the Tokyo Stock Exchange’s Prime Market traded below book value. Some 47% produced return on equity below 8%.
The first number has since changed dramatically. According to the Japan Exchange Group, the share of Prime companies below one-times PBR had fallen to 27% by March 2026.
The second number changed much less. The share producing ROE below 8% was still 43%.
That contrast is revealing.
Japan’s valuation improved faster than its weakest corporate returns disappeared. Investors rewarded progress, but corporate Japan did not solve every capital-efficiency problem.
A rerating does not require every company to become excellent at once. It does require investors to believe that more shareholder-conscious behaviour will persist.
Japan’s corporate sector once looked much more like today’s Korea than many investors remember.
Japan Re-Rated Because Corporate Behaviour Changed
Japan’s reform history can be reduced to three turning points.
The Stewardship Code, introduced in 2014, encouraged institutional investors to engage more actively with companies. https://www.fsa.go.jp/en/policy/corporategovernencereform/20240115.html
The Corporate Governance Code, introduced in 2015, pushed companies toward stronger boards, greater transparency and more attention to sustainable corporate value.
Then, in March 2023, the Tokyo Stock Exchange asked all Prime and Standard companies to explain how they would manage with greater awareness of their cost of capital and share price. https://www.jpx.co.jp/english/equities/follow-up/
The 2023 initiative was not a mechanical requirement to lift PBR above one. TSE asked boards to analyse profitability, cost of capital and valuation, disclose improvement plans and update progress. It applied even to companies already trading above book.
Japan was not simply telling companies to raise their share prices. It was asking them to explain why their businesses deserved the capital shareholders had entrusted to them.
The behavioural response became increasingly visible.
Dividends and share repurchases rose sharply. Cross-shareholdings declined. Companies became more willing to sell non-core assets, review business portfolios and cancel treasury shares rather than hold them indefinitely.
Japan’s Financial Services Agency reports that cross-shareholdings among listed companies had fallen to 11.2% of market capitalisation by fiscal 2023 under its stated definition. The same FSA material shows a sustained increase in both dividends and buybacks.
Japan did not rerate simply because Japanese stocks were cheap.
Investors began to believe that some of the reasons they had been cheap were disappearing.
There is an important counterargument. Governance reform was not the only force behind the rally. Japanese profits improved. A weaker yen supported exporters. Monetary conditions were unusually loose. Foreign investors returned, and the later semiconductor and AI cycles lifted technology-related stocks.
The lesson is therefore not that one exchange directive produced a sixfold market gain.
It is that better earnings became more valuable because investors also saw evidence of changing capital allocation and governance.
Korea Is Beginning to Walk the Same Road—On Its Own Terms
The similarities with Korea are real, but the phrase “Korea copied Japan” is too simple.
Japan provides the precedent, not the blueprint.
Korea’s Corporate Value-Up Program began in 2024 as a voluntary framework. Listed companies were encouraged to analyse their current valuation and capital efficiency, establish medium- to long-term targets, disclose implementation plans and communicate progress with investors. https://www.fsc.go.kr/eng/po110101/82795
That resembled Japan’s approach. The structural problems beneath it were not identical.
The destination is similar: more efficient capital allocation and stronger treatment of shareholder capital.
The institutional route is different.
Korea’s Reform Is Becoming Much More Than a Value-Up Program
The original Value-Up framework was voluntary. That limited its force.
What changed next is more important.
An amendment to Korea’s Commercial Act, effective July 23, 2026, states that directors must faithfully perform their duties for the company and its shareholders. It also requires directors to protect the interests of shareholders as a whole and treat all shareholders fairly.
The wording does not guarantee different outcomes in every shareholder dispute; enforcement, court interpretation and board practice will determine its effect. But part of shareholder protection has moved from voluntary guidance into corporate law.
A separate Commercial Act amendment, effective March 6, 2026, addressed another controversial practice. Newly acquired treasury shares must now be cancelled within one year in principle, while existing shares generally receive an 18-month transition period. Exceptions require a retention or disposal plan approved by shareholders.
This is important because treasury shares in Korea could be retained or transferred without giving minority investors the economic benefit associated with cancellation.
The new treasury-share framework does not eliminate every exception. It changes the default from indefinite retention toward cancellation. https://www.fsc.go.kr/eng/pr010101/87173
Duplicate-listing rules have also moved beyond general criticism. Effective August 3, 2026, they established a principle of prohibition with exceptions, not an absolute ban. The parent board must examine the effect on ordinary shareholders and the exchange applies enhanced review. Shareholder approval is mandatory for listings following a physical spin-off. https://www.fsc.go.kr/eng/index
It targets the Korea-specific concern that a valuable business can be separated and listed while existing parent shareholders lose part of the value they thought they owned.
Low-PBR pressure is also becoming more explicit—but this is one area where the timing must be stated carefully. As of September 2026, the FSC and KRX framework for publishing persistently low-PBR companies was still moving through final implementation. The first publication was targeted for November 2, 2026. It should not yet be described as an operating list.
Korea has also introduced separate taxation for qualifying high-dividend-company distributions from January 2026, tying eligibility disclosures to Value-Up plans.
Taken together, the reforms no longer amount to one voluntary Value-Up campaign.
They are beginning to change the legal and institutional environment in which Korean companies allocate shareholder capital.
https://www.fsc.go.kr/eng/pr010101?srchCtgry=5
Then Two Powerful Forces Began to Converge
The structural argument alone would already be important.
But Korea is not entering this reform cycle with flat corporate earnings.
It is entering it during an extraordinary AI-memory boom.
The relationship is simple:
AI infrastructure investment increases demand for HBM, server DRAM and enterprise storage. That improves memory pricing and product mix. Samsung Electronics and SK Hynix then generate higher profits.
In the second quarter of 2026, Samsung Electronics reported record consolidated operating profit of KRW 89.5 trillion. Its semiconductor division produced KRW 89.2 trillion. SK Hynix reported record quarterly operating profit of KRW 60.5 trillion.
Those figures are unlikely to represent a permanently repeatable run rate. Memory remains cyclical, capacity will respond, and investors are already debating the durability of hyperscaler AI spending.
But they demonstrate the unusual scale of the earnings engine now operating alongside reform.
The framework can be reduced to one line:
Stock price ≈ earnings × valuation multiple.
AI can lift the earnings. Better capital allocation, governance and shareholder treatment can lift the multiple investors are willing to pay.
What is unusual about Korea is not that earnings growth and rerating can occur together. Japan experienced both.
It is the scale and timing of Korea’s AI-memory earnings boom arriving just as shareholder and governance reforms accelerate.
Korea Did Not Lack Reform. It Lacked Breadth.
At first, I assumed Korea’s enormous index rally meant the market had already completed much of its rerating.
The shareholder-return data complicated that conclusion.
Across the KOSPI and KOSDAQ markets, KRX disclosures show that corporate behaviour had already begun changing before the broad market fully rewarded it.
The acceleration continued. Listed companies cancelled KRW 43.1 trillion of treasury shares in the first five months of 2026—more than twice the total for all of 2025. A few very large companies contributed heavily to that figure, so it should not be treated as proof that every company changed equally.
The direction is nevertheless difficult to dismiss.
Korean companies were returning more capital to shareholders. Yet index leadership remained visibly concentrated in Samsung Electronics, SK Hynix and other AI-related leaders.
Buybacks depend on corporate cash and board decisions, not on where secondary-market investors place their money. The more defensible interpretation is that shareholder-friendly behaviour was spreading, but investor buying remained concentrated in semiconductor winners. Many improvements therefore did not translate into an equally broad share-price rerating.
Corporate reform was broadening.
The rally was not.
Korea did not lack reform. It lacked breadth.
KOSPI Nearly Quadrupled. Why Is So Much of Korea Still Below Book?
The scale of the index move is difficult to overstate.
The KOSPI closed at 2,293.70 on April 9, 2025. On June 18, 2026, it closed at 9,063.84—approximately 3.95 times higher.
That was an extraordinary national-market rally.
Yet on June 4, 2026, official data showed that 1,368 of 2,556 KOSPI and KOSDAQ companies—53.5%—were still trading below book value.
The apparent contradiction is the heart of the Korean thesis.
The index had nearly quadrupled, but more than half of listed corporate Korea was still valued below its accounting equity.
Low PBR does not automatically mean a stock is cheap. A company that earns less than its cost of equity or allocates capital badly may deserve to trade below book. Nor does the statistic prove that Value-Up failed; PBR can reflect weak earnings expectations as well as market concentration.
But the coexistence of a near-fourfold index rally and 53.5% low-PBR breadth tells us something important.
The index re-rated much faster than corporate Korea underneath it.
The first phase was primarily an earnings and leadership story. A genuine Japan-style re-rating would require the market to reward improving behaviour across a much wider range of businesses.
The Japan–Korea Mirror Test
Japan’s experience offers a way to separate a powerful rally from a durable market transformation.
This is why foreign flows need to be read carefully.
Global investors have already seen a chronically discounted Asian market transform itself once. They do not need to learn the Japan rerating story from scratch.
But the total amount foreigners buy is less informative than what they buy.
If purchases remain concentrated in Samsung Electronics and SK Hynix, the evidence still points primarily to an AI-semiconductor trade. If buying spreads toward financials, holding companies, autos, industrials, telecoms, consumer companies and other low-PBR sectors, the case for a broader structural rerating becomes stronger.
Japan is therefore not a target price for Korea.
It is a set of signals Korea must reproduce.
What Would Confirm the Thesis?
Five indicators would show that Korea is progressing from an AI-led index rally toward a broader Japan-style re-rating.
First, the share of companies trading below book must fall across sectors, not only among index giants.
Second, ROE must rise outside AI and semiconductors.
Third, dividends and treasury-share cancellations must become recurring policy rather than one-off responses.
Fourth, holding-company and parent-subsidiary discounts must narrow.
Fifth, foreign buying must broaden beyond Korea’s semiconductor champions.
None of these signals requires every low-PBR stock to rise. Some companies will remain structurally weak, and greater market discipline should distinguish reformers from non-reformers.
That distinction would itself be progress.
What Could Break the Thesis?
The greatest risk is that formal reform fails to change actual corporate behaviour.
Directors’ duties can be rewritten, but enforcement may disappoint. Treasury shares can be subject to cancellation rules, but exceptions may be used aggressively. Duplicate-listing reviews can be strengthened, but controlling shareholders may find new structures. Dividends and buybacks can rise temporarily while returns on capital remain weak.
The second risk is cyclical.
If memory profitability normalises sharply before the broader market begins to rerate, Korea could lose its earnings engine before its structural engine is strong enough to take over.
The third risk is valuation itself. A market can move from underpriced to overpriced faster than corporate fundamentals improve.
Higher PBR cannot be sustained by policy slogans alone. Ultimately, it requires better returns on capital and better treatment of shareholder capital.
The Verdict: Japan Is the Precedent, Not the Promise
Japan’s lesson is not that low-PBR markets automatically rise sixfold.
It is that a discount investors once considered permanent can disappear when companies begin earning, allocating and returning capital differently.
South Korea is moving down a similar road through reforms designed around the structural causes of the Korea discount. Voluntary Value-Up disclosure is being reinforced by directors’ duties toward shareholders, mandatory treasury-share cancellation, tougher duplicate-listing review and more explicit pressure on persistently low-PBR companies.
At the same time, the AI infrastructure boom is generating extraordinary earnings for Korea’s semiconductor champions.
One force is changing earnings.
The other could change the multiple investors are willing to pay.
That combination makes Korea unusually interesting. It does not make the outcome certain.
The KOSPI’s first extraordinary rally demonstrated the power of the earnings engine. The persistence of more than half of listed companies below book shows how incomplete the broader transformation remains.
The next phase will therefore be more revealing than the first.
If ROE improves outside semiconductors, shareholder returns remain structural, group discounts narrow and foreign buying broadens, Korea will begin to look less like a concentrated AI trade and more like a market undergoing a genuine institutional rerating.
If those changes do not occur, the comparison with Japan will remain an attractive narrative rather than an investable transformation.
Japan showed that demographics do not have to dictate market destiny. More importantly, it showed that cheapness alone does not create a re-rating. Corporate behaviour must change first.
Korea’s first great rally was led by its AI winners.
The real test of a Japan-style rerating is whether the next phase spreads to the companies the market has spent decades valuing below book.