Challenges for Korea’s value-up program

Ahn Dong-hyun
The author is a professor of economics at Seoul National University.

Korean stock markets swung last week after expectations of a government stimulus package through the so-called Corporate Value-up Program became disappointment. The program, it turned out, lacked sufficient teeth to prop Korean shares to the level of their bullish Japanese, U.S., and European neighbors.

The undervaluation of Korean shares, dubbed the “Korea Discount,” is nothing new. Low transparency in corporate ownership structure and relatively stingy shareholder returns, among other factors, are behind the underperformance of Korean stocks. No blanket policy can account for them all.

Some blame a lack of carrots, like tax incentives, or sticks, like threats of delisting, to encourage companies to strive harder to bolster their shares voluntarily. But successful stimulus actions in Japan — led by the Tokyo stock exchange, which the Korean government had benchmarked — were designed to motivate companies to come up with a voluntary road map to improve their management and stock performance. The only difference is that the Tokyo exchange warned companies whose stocks were performing under their book value that they would face delisting if they couldn’t raise their price-to-book-ratio by 2026.

But Japan’s red-hot stock market cannot entirely thank Tokyo’s pressure on its listed companies.

Japan has been activating its value-up program since 2014 by prompting firms to shift their governance structure towards their boards, enhance transparency and implement the stewardship of institutional players like national pensions as part of the structural reforms of Abenomics. In other words, Japan built its program gradually over a span of 10 years to reinvent Japanese companies and stocks. Korea, by contrast, hoped its first kick would go straight into the goal. Its latest move should be regarded as an attempt to galvanize companies to pay more attention to their management structure and shareholder-friendly programs.

Japan has been unique in the way its central bank sustained a novel qualitative easing program from December 2010 by directly purchasing exchange-traded funds (ETFs) following Nikkei 225 stocks. The Bank of Japan’s ETF holdings amount to 30 trillion yen ($199.3 billion), equivalent to 5 percent of the total capitalization of Japanese stocks. The central bank’s share in the ETF market has hovered over 50 percent since 2016.

Japan’s central bank has opted for an unconventional monetary policy of purchasing stocks through its reserves to prop up the domestic market, which is responsible for 70 percent of the nation’s GDP. Shares have been headed north since the end of 2012 with the pickup of the ETF purchasing program. They were 3.4 times higher by the time the Tokyo Exchange’s valuation stimuli program was announced last March. Stock gains over that period were the second highest in the world after those of the United States. The value-up program reached its pinnacle after the stacking of corporate reforms and the central bank’s stock purchase program took effect.

The rally in the Tokyo stock market gained further traction through the fast weakening of the yen, beginning in late October of 2020. The Japanese economy had been struggling with a deflationary plague for 30 years. The yen’s weakening against the greenback was understood as the last push towards the end of the deflationary tunnel. Foreign capital ebbing from China since late last year also funneled into Japan and India, fueling the Tokyo bourse. The stock boom in Japan, therefore, was driven by an array of factors, and the value-up program was just one of them.

Korea has made its first step towards bolstering its stock fundamentals with the latest package. Authorities must strive to preserve the stock market’s upward trend. Once investors are convinced, they will make long-term investments, and capital will veer away from real estate to the stock market. A laborious and lengthy process was only successful in the United States. Stock history since 2000 shows that the eurozone still has a long way to go.

If it wants to bolster the stock market, the government has hordes of tasks ahead. It must cut inheritance and gift taxes from the world’s highest levels, strengthen punishments for unfair practices, seize ill-gotten profits, address duplicated listings and a surge in listed shares as a result of mutations in the venture ecosystem, enhance institutional roles, and lower commission fees, to name just a few.

Moreover, the blind faith in the property market must be broken. All these actions require concentrated efforts from not only financial authorities, but also entire government, including the Ministry of Economy and Finance; the Fair Trade Commission; the Ministry of SMEs and Startups; the Ministry of Land, Infrastructure and Transport; the Justice Ministry; and the Board of Audit and Inspection. The government must lead the market down its long-term path.

Translation by the Korea JoongAng Daily staff.