🚨 Korea's WGBI Inclusion
Today Korean Economic News for Beginners | 2025.10.09
0️⃣ 75 Trillion Won Inflow Expected, Impact on Interest Rates, Exchange Rates, and Stock Market
📌 Inclusion in World's Top 3 Bond Index Brings Large Global Investment, Signaling Structural Changes in Korea's Financial Market
💬 Starting April next year, Korean government bonds will be gradually included in the FTSE World Government Bond Index (WGBI), with approximately 75 trillion won of foreign investment expected. WGBI is one of the world's top 3 bond indices, along with Bloomberg Global Aggregate Index and JP Morgan GBI-EM, and serves as a benchmark for pension funds and asset managers worldwide. This is a typical passive index. When Korea joins this index, global funds that follow the index will automatically buy Korean government bonds, leading to lower bond interest rates, stable exchange rates, and positive effects on the stock market. However, some experts are cautious, noting that since most funds will go to the bond market, direct impact on the stock market may be limited. Market experts advise, "Focus on long-term structural improvements in the financial market rather than short-term volatility."
1️⃣ Easy Explanation
Korean government bonds are being officially registered as globally recognized investment targets, which means foreign investors will buy large amounts of Korean bonds. Let's learn how this will affect our economy and stock market.
First, we need to understand what 'WGBI' means. WGBI stands for 'World Government Bond Index' - it's a collection of government bonds from major countries around the world. Think of it as a 'list of safe and trustworthy government bonds from around the world.' Currently, this index includes bonds from 23 countries including the United States, Japan, Germany, France, and the United Kingdom. Korea will become the 24th country.
Here's an important concept: 'passive investing.' Many pension funds and asset managers around the world don't actively choose which bonds to buy. Instead, they simply follow an index like WGBI. For example, if US bonds make up 40% of WGBI, they invest 40% of their money in US bonds. This approach is called 'passive investing.'
What happens when Korea joins WGBI? Passive funds around the world must automatically buy Korean government bonds. Experts estimate this will bring in about 75 trillion won. This won't happen all at once - it will flow in gradually over 18 months from April 2026 to September 2027.
What changes will this money bring to our economy? The most direct effect is lower bond interest rates. In the bond market, when demand increases, bond prices go up, and when bond prices go up, interest rates go down. Think of it like a seesaw. When foreigners want to buy lots of Korean bonds, bond prices rise and interest rates fall.
Lower bond interest rates bring many benefits. The government can borrow money at lower interest rates, reducing the burden on public finances. Companies can also raise money at lower rates when they issue corporate bonds. Bank loan rates are also affected by government bond rates, so eventually mortgage and credit loan rates for individuals may also decrease.
The second effect is exchange rate stability. For foreign investors to buy Korean bonds, they first need to exchange their currency for Korean won. To buy 75 trillion won worth of bonds, they need 75 trillion won in Korean currency. This increased demand for won tends to strengthen the Korean currency. When the won strengthens, the exchange rate goes down. For example, the exchange rate might fall from 1,300 won per dollar to 1,250 won.
When the exchange rate stabilizes, import prices decrease, helping with price stability, and it becomes more favorable for overseas travel. While this might be somewhat unfavorable for export companies, overall it increases economic stability.
The third question many people have is about the stock market. Won't KOSPI also rise when this much money flows in? This part is a bit complicated. Most of the incoming money will be used to buy government bonds, not stocks directly. So it's difficult to expect KOSPI to surge in the short term.
However, there are clear indirect positive effects. First, when interest rates fall, companies' funding costs decrease, improving their business environment. Second, as foreign investors' interest in the Korean market increases, some funds may flow into the stock market. Third, exchange rate stability reduces foreign investors' currency risk when investing in Korean stocks.
Looking at past cases, when China was included in global bond indices in 2012, initially only the bond market was activated, but over time it also had positive effects on the stock market. Korea may follow a similar pattern, but rather than expecting stock prices to surge starting in April next year, it's wise to take a long-term view.
In the end, WGBI inclusion is a meaningful event where Korea moves up a level in the global financial market, and we can expect stable bond interest rates, stable exchange rates, and indirect positive effects on the stock market.
2️⃣ Economic Terms
📕 WGBI (World Government Bond Index)
WGBI is a bond benchmark index based on government bonds from major countries worldwide, and global passive investment funds automatically follow this index composition.
- It is one of the world's top 3 bond indices operated by FTSE Russell, currently including 23 countries.
- Korea will be gradually included over 18 months starting April 2026, with a final weight of approximately 2.3%.
- The global assets tracking this index amount to approximately $3 trillion (about 4,000 trillion won).
📕 Passive Investment
Passive investment is an investment method where fund managers don't actively select securities but simply follow the composition and weight of a specific index.
- It contrasts with active investment, where managers actively select securities.
- ETFs (Exchange Traded Funds) are typical passive investment products.
- It has advantages of low management fees and pursuing market average returns, and has been growing rapidly recently.
📕 Government Bond Interest Rate
Government bond interest rate is the interest rate on bonds issued by the government and serves as the benchmark interest rate for a country's financial market.
- There is an inverse relationship: when demand for government bonds increases, bond prices rise and interest rates fall.
- Government bond interest rates serve as the basis for all interest rates including corporate bond rates, deposit rates, and loan rates.
- The 10-year government bond rate is used as a representative long-term interest rate indicator.
📕 Exchange Rate Stability
Exchange rate stability means the Korean won maintains its value within a certain range without rising or falling sharply.
- When foreign investment funds flow in, demand for won increases, creating pressure for won appreciation (exchange rate decline).
- When the exchange rate stabilizes, import prices stabilize, which is favorable for inflation management.
- However, there is a two-sided nature: it can somewhat weaken the price competitiveness of export companies.
3️⃣ Principles and Economic Outlook
✅ WGBI Inclusion Process and Fund Inflow Scenario
Let's look at the specific process of Korean government bonds being included in WGBI and the fund inflow scenario.
First, inclusion will take place gradually over 18 months. Starting from April 2026, the weight of Korean government bonds will increase monthly at a certain rate. In the first month, only about 5% of the total will be included, and then the weight will gradually increase each month until full inclusion in September 2027. The final target weight is about 2.3%, meaning 2.3% of global funds tracking WGBI will be invested in Korean government bonds. The reason for this gradual inclusion is to avoid sudden shocks to the market.
Second, approximately 75 trillion won is estimated to flow in. Currently, the global assets tracking WGBI amount to about $3 trillion (about 4,000 trillion won), and 2.3% of this would be about $69 billion (about 92 trillion won) coming to Korea. However, since some foreign investors already hold Korean government bonds, and not all passive funds track the index 100%, the actual net inflow is expected to be less. Various expert institutions estimate the net inflow between 50 and 80 trillion won, with an average expectation of about 75 trillion won.
Third, fund inflows will be concentrated on 3-year, 5-year, and 10-year government bonds. WGBI only targets government bonds with maturity of 1 year or more, and particularly prefers medium to long-term government bonds with good liquidity. In Korea's case, 3-year, 5-year, and 10-year government bonds are most actively traded, so funds will flow to these securities. This will bring about a decline in medium to long-term government bond rates, and with reduced interest burden, the government will have more room in fiscal operations.
Through the gradual inclusion process, stable fund inflows will occur in the medium to long term while minimizing market shocks.
✅ Interest Rate Decline and Financial Market Ripple Effects
Let's analyze the specific ripple effects of government bond interest rate decline on other financial markets.
First, it has a positive effect on the corporate bond market. When government bond rates fall, corporate bond rates also fall together. Corporate bond rates are usually determined by 'government bond rate + credit spread,' because government bond rates serve as the reference point. For example, if the 10-year government bond rate falls 0.3 percentage points from 3% to 2.7%, the high-grade corporate bond rate of the same maturity could fall from 3.5% to 3.2%. This leads to reduced funding costs for companies, increasing their investment capacity.
Second, it also affects bank loan rates. The most important indicator banks refer to when setting loan rates is government bond rates. When government bond rates fall, banks' funding costs decrease, which can lead to lower mortgage and credit loan rates. However, this effect is not immediate, and will appear with a time lag depending on the Bank of Korea's base rate policy and banks' management decisions. Generally, it takes 3-6 months for government bond rate changes to be reflected in loan rates.
Third, there are changes in the returns of bond funds and pension products. When government bond rates fall, the value of bonds issued at higher rates increases, improving bond fund returns in the short term. However, in the long term, newly included bonds will have lower rates, so the overall fund returns will gradually decline. Products like pension savings and IRP are also affected similarly because they invest significantly in bonds. For investors, it may be advantageous to invest in long-term bonds when rates are high.
The decline in government bond rates will lower funding costs for the government, companies, and individuals overall, contributing to economic activation.
✅ Exchange Rate Stability and Real Economy Impact
Let's look at how exchange rate stability from foreign fund inflows affects the real economy.
First, import price stability effects appear. When the won appreciates (exchange rate falls), you can buy more foreign products with the same money. For example, if the exchange rate falls from 1,300 won per dollar to 1,250 won, when importing a $1 raw material, you only need to pay 1,250 won instead of 1,300 won. This lowers the prices of major imports like oil, natural gas, and food, helping with overall price stability. This is especially important for Korea, which depends heavily on imports for energy.
Second, it creates a somewhat unfavorable environment for export companies. When the won appreciates, Korean products become relatively more expensive overseas. For example, if a product that sold for $1,000 experiences an exchange rate drop from 1,300 won to 1,250 won, the won-based sales decrease from 1.3 million won to 1.25 million won. Industries with high export dependency like automobiles, steel, and shipbuilding can be significantly affected by exchange rate declines. However, industries with high technological competitiveness like semiconductors and IT products are relatively less affected by exchange rate changes.
Third, foreign exchange market volatility decreases. The stable inflow of 75 trillion won in foreign currency becomes a strong support for the foreign exchange market. It can serve as a buffer to prevent sudden surges in exchange rates when external shocks occur. For example, unlike the sharp decline in won value during US interest rate hikes in 2022, after WGBI inclusion, exchange rate fluctuations are expected to be smaller even in similar situations. This reduces companies' burden of managing foreign exchange risk and increases predictability in trade transactions.
Exchange rate stability is positive for price management and financial stability, but can be somewhat burdensome for export companies' competitiveness.
✅ Indirect Effects on the Stock Market
Let's analyze the indirect impact of bond market fund inflows on the stock market.
First, stock valuations improve due to interest rate decline. When evaluating the fair value of stocks, future cash flows are discounted to present value, and the discount rate used is the interest rate. When interest rates fall, the stock value of a company making the same profit increases. For example, when a company makes 10 billion won in profit annually, if the discount rate falls from 5% to 4%, the company value increases by about 25%. While this theoretically provides room for stock price increases, in reality other variables also work together, so it's difficult to expect immediate effects.
Second, foreign investors' interest in the Korean market increases. Korea's inclusion in WGBI means global investors recognize Korea as a safer and more valuable market to invest in. This brings about a kind of 'credit rating upgrade' effect. Foreign investors who came to invest in bonds may discover attractive stocks while looking at the Korean market and invest additionally. In fact, when Taiwan was included in the MSCI developed market index in the past, bond investors also expanded funds into stocks.
Third, improvements in companies' funding environment can lead to better performance. When corporate bond rates fall, companies can raise funds at low costs and actively pursue facility investment and research and development. This leads to improved corporate performance in the medium to long term, positively affecting stock prices. Industries that require large-scale funding such as construction, aviation, and shipbuilding are expected to benefit. However, since these effects appear gradually over 1-2 years, a long-term investment perspective is needed rather than a short-term investment perspective.
The impact of bond market positives on the stock market is indirect and gradual, so a medium to long-term view is needed rather than excessive expectations.
4️⃣ In Conclusion
Korea's WGBI inclusion is a historic event where our country takes a leap forward in the global financial market. Beyond simply bringing in 75 trillion won, it means Korea's financial market structural stability increases and international trust rises.
The most direct and certain effects are government bond interest rate decline and exchange rate stability. As foreign investors gradually purchase Korean government bonds over 18 months, government bond rates will decline stably, which will lower funding costs for the government, companies, and individuals, positively affecting the overall economy. Also, with increased demand for won, exchange rate volatility will decrease and the foreign exchange market will operate more stably.
The impact on the stock market needs to be viewed more carefully. Since all 75 trillion won won't flow into the stock market, it's difficult to expect KOSPI to surge in the short term. However, there are clearly indirect positive effects such as valuation improvement due to interest rate decline, increased attention from foreign investors, and improved corporate funding environment. If these effects accumulate over time, they will help the stock market in the medium to long term.
However, not everything is rosy. Won strength could somewhat weaken export companies' price competitiveness, and increased dependence on foreign funds could make us more sensitive to global financial market changes. Also, the estimate of 75 trillion won is based on various assumptions, so actual inflows may differ.
For investors, it's desirable to view this WGBI inclusion as a signal showing the medium to long-term growth potential of Korea's financial market rather than a short-term speculation opportunity. If you're interested in bond products, it's worth considering long-term government bonds or bond funds before rates fall further, and stock investors can pay attention to stocks that benefit from interest rate decline or industries where funding is important.
For the government, this opportunity should be used as a chance to raise the country's credit rating by one level. Based on stable fund inflows, fiscal soundness should be improved, foreign exchange market management capabilities should be strengthened, and an institutional foundation should be established to attract more foreign investment.
In the end, WGBI inclusion is an important milestone that will bring medium to long-term positive structural changes to Korea's economy. Rather than short-term expectations, we need an attitude of calmly watching its effects and preparing for the future of a stably growing Korean financial market.
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