Following the inauguration of the Lee Jae-myung administration through the first half of 2026, South Korea’s KOSPI index recorded the highest growth rate among global stock markets. It was an unprecedented phenomenon in the history of our economy and stock market. Whether this upward momentum could be sustained in the second half of 2026—independent of KOSPI target forecasts—was the ultimate point of interest in forecasting the Korean economy and stock market.

An unexpected negative shock struck in late February 2026 with the outbreak of the war between the US and Iran. At the time of the outbreak, many held stagflation concerns for both the global and Korean economies. The prevailing view was that the relentlessly surging global and Korean stock markets would undergo a sharp correction triggered by the Iran war.

However, the global economy and stock markets showed a different pattern. Amid overlapping conflicts, US economic growth in the first half of 2026 exceeded the potential level at 2%. The Korean economy, expected to suffer the most due to its heavy reliance on Middle Eastern crude oil, also grew at the 3% level. Global stock prices and the KOSPI index surpassed pre-war levels, continuing a record-breaking rally.

The issue was that leverage ETFs—meant to be a rescue tool when the stock market is in a slump—were permitted just as stock prices were surging to peaks raising overheat concerns, causing the Korean stock market to experience severe turbulence. The targets were set on Samsung Electronics and SK Hynix, the very companies leading the Korean stock market, causing chaos. Overseas, even the term "Koreafying" emerged, changing how the Korean stock market was viewed.

The saving grace is that "green shoot" phenomena in our economic fundamentals have persisted even during the turbulence surrounding Samsung Electronics and SK Hynix. Although domestic funds show signs of returning to pre-pro-market policy patterns, the shift from consumer-based, collateral-based, and vested-interest finance toward productive, innovative, and inclusive finance remains undisturbed.

The success of the Lee Jae-myung administration's pro-market policies now depends heavily on the next steps. The very first task is to prune the numerous side branches—namely, the endless pessimism—that have sprouted following the introduction of leverage ETF products. Claims that stock market policies were merely for the June local elections or that a foreign exchange crisis would occur if the KRW/USD exchange rate exceeded 1,500 won are representative instances of recent pessimism.

Once the pruning is done, new nutrients must be provided so the main trunk can grow sturdy and bear rich fruit in the fall. Stock market policies must be continuously driven to expand the KOSPI rally—which has been concentrated in specific stocks—to the remaining KOSPI constituent stocks, KOSDAQ-listed stocks, and unlisted companies alike.

The priorities of pro-market policies must also shift. From now on, industrial and market policies that expand the economic recovery and stock price surge led by Samsung Electronics and SK Hynix to remaining KOSPI-listed, KOSDAQ-listed, and unlisted companies are more critical. Depending on the success of these policies, the landscape of the Korean economy and stock market is expected to change.

While post-June 2026 stock market policies were spearheaded by the Lee Jae-myung administration, all citizens must participate in 2027. Just as the gloomy atmosphere right before the inauguration of the Lee Jae-myung administration (stemming from martial law and other events) showed signs of lifting, voices are rising again. To achieve a second leap for our economy and stock market, all citizens must exercise a spirit of pro bono publico (public good).

Entering 2026, the South Korean won exhibited contrasting movements following the early June turning point, earning labels as a "second-class currency" in the first half and a "core currency" in the second half. Opinions regarding the 2027 outlook are similarly divided: one view emphasizes the stigma effect of the 2026 first half and expects a rebound to the 1,400-won range, while another considers the euphoria effect of the 2026 second half and anticipates a drop to the 1,200-won range.

In the first half of 2026, the KRW/USD exchange rate moved in ways reminiscent of the 1990s foreign exchange crisis, actually reviving fears of a second FX crisis. In absolute terms, it climbed to 1,560 won, weakening the won not only against the dollar but against almost all cross-currencies. Volatility fluctuated even more severely than Southeast Asian currencies, including the Thai baht.

However, the second half of 2026 saw a completely reverse pattern. The KRW/USD exchange rate—which some projected could soar to 2,000 won—plunged by over 230 won in a short span of less than three months. In terms of the rate of decline over the same period, it was the fastest among all global currencies. Volatility also contracted to one-third of the first-half level.

Even more encouraging is that since the second half of 2026, the won’s value has exhibited independent movements away from uncontrollable behavioral variables. Most notably, the KRW/USD exchange rate plummeted despite rising US Treasury yields, remaining unshaken by the advanced economies' debt turmoil. In the first half of 2026, its correlation coefficient with the US 10-year Treasury yield was as sensitive as +0.7.

Along the same lines, a decoupling phenomenon from the dollar index also emerged. Notably, contrary to most expectations, this phenomenon became even more pronounced after the US Federal Reserve raised benchmark interest rates. There has never been a time since the opening of the domestic foreign exchange market when decoupling from the dollar index was as severe as it has been since the second half of 2026.

By currency, the chronic coupling with the Japanese yen completely shifted to a decoupling phase. The KRW-JPY correlation coefficient, which had climbed up to +0.6 at the end of 2025, plummeted to around -0.3 in the second half of 2026. Over the same period, the KRW-JPY exchange rate tumbled from the 970-won range per 100 yen to below 850 won.

The weakening of synchronization with the Chinese yuan is also noticeable. Entering the second half of 2026, the yuan exchange rate has maintained a typical Bairo-Grossman regime—equilibrium amidst imbalance—centered around 6.7 yuan per dollar. Applying the +0.7 KRW-CNY correlation coefficient from the first half of 2026, the KRW/USD exchange rate should have stayed above the 1,470-won mark, yet it plunged into the low 1,300-won range.

The status of the won has also risen. As debt turmoil made issuing dollar-denominated bonds difficult in international bond markets, "Arirang bonds"—won-denominated bonds—have gained popularity, centered around Southeast Asian nations. Credit Default Swap (CDS) spreads, an indicator predicting national default, are forming lower than those of the United States.

Ahead of 2027, internal factors are overpowering external factors in determining the KRW/USD exchange rate as the won moves independently on behavioral variables and its stature rises. Most forecasting institutions project growth rates for 2026 and 2027 to exceed potential levels. Current account surpluses are expected to maintain the $400 billion range through next year.

The KRW/USD exchange rate sits around the 1,350-won level estimated as appropriate based on the real effective exchange rate. To stabilize import prices, alleviate additional interest rate hike burdens, attract foreign capital, and secure resources for US investments in 2027, it needs to decline further. It appears desirable for foreign exchange authorities to leave the market alone until it drops below 1,250 won, where adverse impacts on semiconductor exports might become a concern.

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