Japan Stocks’ ‘Korea Linkage’ Frustrates Tokyo Brokers as Fundamentals Get Drowned Out

Short-term futures money is driving the market

Korean and Japanese stocks share heavy semiconductor exposure

Global investors are trading the two markets as a pair

Japan-specific corporate catalysts are getting drowned out

Concern is growing in Japan’s securities industry over what market participants call a “Korea linkage,” with moves in Japanese stocks becoming overly tied to South Korea, the Nikkei newspaper reported on Aug. 6.

Sharp swings in semiconductor shares such as Samsung Electronics Co. and SK Hynix Inc. are rippling through Japanese equities, burying company-specific factors such as earnings and valuations and delaying the return of long-term overseas investors.

The Nikkei 225 Stock Average rose more than 2,000 yen intraday on Aug. 5. AI- and semiconductor-related shares including Ibiden Co., which reported strong earnings the previous day, as well as Advantest Corp., Fujikura Ltd. and Kioxia Holdings Corp., all jumped and helped lift the index.

Even so, the market mood was less exuberant than the index’s rise suggested. A trader at a major Japanese brokerage said overseas long-only investors were instead shifting funds into domestic-demand shares. The buying in AI-related stocks was so strong, the trader added, that it was hard to tell who was behind it.

Recent gains have been led more by short-term money trading stock-index futures than by long-term foreign capital. That has reinforced investor concerns over the market’s “Korea linkage.”

The Nikkei 225 and the Kospi are both heavily weighted toward AI and semiconductor names, prompting global investors to treat them as effectively the same trade. As a result, when Korean stocks swing sharply on supply-and-demand factors, Japanese stocks often move hard in the same direction.

That pattern was visible again on Aug. 5. As the Kospi trimmed its gains during the session, the Nikkei also lost momentum. Japanese market participants complain that the Korean market’s sharp moves are spilling into Tokyo, making it harder to evaluate stocks based on individual companies’ earnings, growth prospects and share-price levels.

Hedge funds and institutional investors that were burned by last month’s selloff in AI-related shares have also yet to increase risk exposure. Naohide Une, head of Investment Lab, said the market had moved past the point of peak pessimism, but high volatility still made it difficult to quickly raise portfolio weightings.

Recent declines have substantially eased valuation concerns for some AI and semiconductor shares, including Tokyo Electron Ltd. and Murata Manufacturing Co. Demand for AI investment also remains strong. Even so, investors are finding it difficult to buy aggressively when share prices are being driven more by Korean equity flows than by corporate earnings.

The yen’s strength following joint foreign-exchange market intervention by US and Japanese authorities has added to the pressure. A firmer yen has reduced earnings expectations for exporters such as automakers, while conviction in further gains for AI-related shares remains weak, sapping momentum in the Japanese stock market.

Market participants see September as the earliest point when overseas investors could resume serious buying of Japanese stocks. Large Japanese and foreign brokerages are set to host a series of major conferences that will bring overseas investors together with Japanese companies.

BofA Securities will hold one such event from Aug. 31 to Sept. 4. The number of investors expected to attend has already surpassed last year’s total, and requests for one-on-one meetings with AI-related companies have in some cases risen fourfold from a year earlier, according to the Nikkei.

If overseas investors return to cash equities after reassessing individual companies’ earnings and growth prospects, the excessive co-movement between Japanese and Korean stocks could also ease. Japanese brokerages are watching to see whether the market can break free of the “Korea linkage” and return to fundamentals-driven trading, which they view as key to any further gains by year-end.

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