The global stock market crash that began in the U.S. last Friday has sent shockwaves through East Asian markets, with South Korea, Japan, and Taiwan experiencing record-breaking declines in their representative stock indices on August 5. The KOSPI, Nikkei, and TAIEX all plummeted, marking a significant downturn attributed to a confluence of factors.
In Japan, experts largely pointed to the adverse effects of last month’s interest rate hike as a primary cause of the crash. Meanwhile, South Korea and Taiwan, which have recently kept their interest rates unchanged, were not spared from the turmoil. Analysts suggest that the semiconductor-centric economic structures of these two countries made them particularly vulnerable to the downturn.
On the other hand, the “bubble theory” surrounding the artificial intelligence (AI) industry in the U.S. has played a role in the declines seen in South Korea and Taiwan. Concerns about the sustainability of high valuations in the AI sector have led to broader market apprehensions, affecting semiconductor stocks heavily tied to AI advancements.
Additionally, the unwinding of the “yen carry trade”’ has exacerbated the situation. This strategy, where investors borrow yen at low interest rates to invest in higher-yielding assets globally, has seen a reversal, negatively impacting stock markets in South Korea and Taiwan.
Global investors’ tendency to group East Asian countries like South Korea, Japan, and Taiwan together for investment purposes has further intensified the “group effect.” Professor Ahn Dong-hyun of Seoul National University’s Department of Economics explained, “Institutional investors typically invest in global regions rather than specific countries, and South Korea, Japan, and Taiwan are grouped as representative “East Asian stocks.” When Japanese stock prices plummet and investors try to sell, they also sell South Korean and Taiwanese stocks, causing their indices to fall together.”
The simultaneous drop in the price of Bitcoin during this crash is also attributed to the group effect. Professor Ahn noted, “Many investors have constructed risk asset portfolios that include both stocks and Bitcoin. As stock prices fall, they reduce the overall proportion of risk assets, naturally increasing the selling pressure on Bitcoin.”
The current status of the markets remains volatile, with investors closely monitoring developments. The interconnectedness of global stock markets, interest rate policies, and the economic structures of these East Asian countries suggest that further fluctuations could be on the horizon. As the situation evolves, market participants will be keenly watching for any signs of stabilization or further decline.
