"Black Tuesday" for Japanese and South Korean Stock Markets: Korean Circuit Breaker Triggered, Nikkei Plunges, AI Hype Faces a Cyclical Adjustment

Original by Odaily (@OdailyChina)

Author: Qin Xiaofeng (@QinXiaofeng 888 )

Today, Asian stock markets experienced severe turbulence.

South Korea's KOSPI index plummeted over 8% intraday, triggering the market circuit breaker mechanism and suspending trading for 20 minutes. It eventually closed down nearly 10% at 8203.84 points, recording the third-largest single-day drop of the year. Japanese markets also came under pressure, with the Nikkei 225 index falling approximately 3.5% to close near 69,788 points, ending its previous eight-day winning streak. The TOPIX index fell by about 2.6%.

This adjustment hit technology stocks hardest, particularly the semiconductor sector. Heavyweights like Samsung Electronics and SK Hynix led the decline, dragging down the entire market. Foreign capital accelerated its sell-off, trading volume surged significantly, and market panic sentiment clearly intensified.

Since June, both Japanese and South Korean stock markets have experienced multiple sharp fluctuations. The KOSPI has triggered circuit breakers four times this year. Previously driven by the AI and semiconductor boom, the KOSPI had approached an all-time high of 9385 points, while the Nikkei 225 had briefly stood above 70,000 points. In just a few weeks, the shift from record highs to a substantial correction highlights market fragility and profit-taking pressure. Odaily will analyze this from three perspectives: market performance, underlying causes, and future outlook.

1. Market Crash: From All-Time Highs to Circuit Breaker Alerts

On June 23rd, the KOSPI opened at 9083.54 points and briefly surged to an intraday high of 9175.45 points. However, driven by foreign selling and follow-on sell orders, the index rapidly plunged. Around 2:33 PM, the decline exceeded 8%, triggering the Korea Exchange (KRX) circuit breaker, suspending trading of all KOSPI constituent stocks for 20 minutes. The similar mechanism had already been activated on multiple days, including June 5th and 8th, indicating that volatility has become the norm.

At the close, the KOSPI stood at 8203.84 points, recording a single-day drop of 9.99%. Trading volume surged to 48.371 billion shares. Semiconductor giants like SK Hynix and Samsung Electronics led the decline, each falling over 12%. The KOSDAQ index proved even more fragile, simultaneously dropping over 6% as small-cap tech stocks plunged collectively. Net selling by foreign investors was significant, becoming the primary source of selling pressure.

The Japanese market reaction was relatively moderate but still noteworthy. The Nikkei 225 index fell over 3% intraday, closing around 69,788 points, a single-day drop of about 3.47%, with the TOPIX index also retreating. Technology and semiconductor-related stocks performed the worst: SoftBank Group fell over 10%, chipmaker Kioxia plunged 15.1%, and Tokyo Electron dropped 6.2%. The AI and semiconductor sectors, which had previously driven the Nikkei's rally, corrected broadly, ending the eight-day winning streak.

Compared to recent highs, this correction is substantial. The KOSPI has fallen over 12% from its mid-June peak, and the Nikkei 225 has significantly retraced from above the 70,000-point level.

The global market correlation was evident. US tech stocks faced collective pressure overnight, with the Nasdaq falling over 1% and the S&P 500 slightly lower. Rotation occurred among the "Magnificent Seven," with stocks like Amazon and Meta leading the decline. Other Asian markets, such as Taiwan, were also affected, forming a regional tech stock sell-off.

Overall, this was a rapid and severe correction led by the technology sector, with the South Korean market falling much more than Japan's due to its high concentration.

2. Cause Analysis: A Phased Burst of the AI Bubble Under Multiple Overlapping Factors

The sharp decline in Japanese and South Korean stock markets results from a confluence of factors, which can be analyzed from dimensions such as direct triggers, macroeconomic policy pressures, and structural risks.

2.1 Direct Trigger: Overnight Weakness in US Tech Stocks and Profit-Taking Pressure

A notable correction in the US technology sector on the previous trading day directly transmitted to Asian markets. The Nasdaq fell over 1.2%, with significant rotation within the "Magnificent Seven" and evident pressure on some individual stocks.

Lisa Shalett, Chief Investment Officer (CIO) of Morgan Stanley Wealth Management, noted: "The rotation within the Magnificent Seven is evident. News of departures by some executives or researchers has heightened market concerns about the pace of AI commercialization. Investors are beginning to demand more evidence that massive AI capital expenditure can translate into sustainable profitability."

This concern quickly spread to the Japanese and South Korean markets, which are highly dependent on the global AI supply chain. South Korea's semiconductor exports account for over 20% of its total exports historically, and Samsung Electronics and SK Hynix together represent about 40% of the KOSPI's weight. On June 23rd, these two giants fell approximately 8%-12%, directly dragging down the index.

Furthermore, Japanese and South Korean markets had accumulated substantial gains since June, leaving ample profits. The KOSPI surged from around 5,000 points at the start of the year to above 9,000 points by mid-June, recording a maximum annual gain of over 80%. The Nikkei 225 also rose from around 40,000 points to above 70,000 points, hitting record highs. Valuations were elevated (KOSPI's forward P/E ratio was near historical highs), making any negative catalyst likely to trigger profit-taking. The concentrated sell-off on June 23rd was a natural correction following the overly rapid earlier rally.

2.2 Macroeconomic and Policy Factors: Rising Expectations of Fed Rate Hikes and Economic Data Impact

The latest strong US employment data has further boosted market expectations for the Federal Reserve to maintain high interest rates or even raise them. According to Reuters, non-farm payrolls increased by 172,000 in May, far exceeding economists' forecast of 85,000, while the unemployment rate held steady at 4.3%. This data led some institutions, such as Goldman Sachs, to push back their first rate cut expectations to 2027. More critically, the Fed's FOMC meeting on June 16-17 decided to keep the federal funds rate unchanged in the 3.5%-3.75% range. The meeting statement emphasized robust economic activity expansion but noted increased uncertainty due to the Middle East conflict, with inflation still above the 2% target.

The Fed's latest dot plot released a clearly hawkish signal: the median federal funds rate forecast for the end of 2026 was raised to 3.8% (a significant 0.4 percentage point increase from the 3.4% forecast in March), implying the possibility of at least one rate hike this year. Simultaneously, the FOMC raised its inflation forecasts for 2026: the median core PCE inflation forecast rose to 3.3%, and overall PCE to 3.6% (both were previously around 2.7%). The GDP growth forecast was slightly lowered to 2.2%.

Interest-rate-sensitive growth stocks, especially in the technology and semiconductor sectors, bore the brunt. South Korean stocks, previously considered typical "high-beta" assets due to the AI boom, are extremely sensitive to changes in global liquidity. Japanese stocks were also constrained by global liquidity expectations, although some support came from improved domestic wage growth data.

These macroeconomic signals significantly pushed up US Treasury yields, suppressing global risk assets and directly exacerbating the selling pressure on Japanese and South Korean tech stocks.

2.3 Structural Risks: High Market Concentration and Foreign Capital Outflows

The structural vulnerability of the South Korean stock market is particularly pronounced. The KOSPI is heavily dependent on two semiconductor giants, Samsung Electronics and SK Hynix, causing the index to fluctuate wildly if the semiconductor cycle or global AI demand wobbles.

Continued foreign capital outflows are another key factor. Foreign investors had accumulated substantial profits during the earlier rally and have recorded net selling multiple times since June, particularly in South Korean stocks. Some funds may have shifted towards US IPOs (like SpaceX) or other assets. On June 23rd, the scale of net foreign selling notably expanded, becoming the primary source of selling pressure.

In contrast, although the Japanese market was also dragged down by tech stocks, its sector diversification is relatively higher, limiting the Nikkei 225's decline to around 3.5%.

Additionally, company-specific dynamics intensified market pressure. According to market sources, SK Hynix recently adjusted capacity allocation for AI memory chips (especially HBM), shifting some production lines towards higher-margin traditional DRAM to optimize short-term profitability. This move raised investor concerns about the short-term supply-demand balance for HBM, triggering selling.

3. Future Outlook: Short-Term Volatility Inevitable, Long-Term AI Narrative Remains Resilient

Looking ahead, Japanese and South Korean stock markets will likely exhibit characteristics of "volatile bottoming and structural divergence." Short-term market volatility will remain high, but medium-to-long-term fundamental support persists. This correction, in fact, provides a window for positioning in high-quality assets.

Short-term volatility is dominant; recovery depends on US stocks and Fed signals. In the near term, the market is still in a high-volatility adjustment phase. The trajectory of US tech stocks is a key bellwether. If the Nasdaq stabilizes or experiences a technical rebound, Japanese and South Korean markets are likely to follow suit and recover. Conversely, if the Fed releases further hawkish signals or if quarterly reports from Japanese and South Korean companies in Q2 disappoint, the correction could extend or deepen. Key events to watch include:

• US inflation (CPI/PCE) and employment data for June-July;
• The Fed's next FOMC meeting (July);
• Q2 earnings results from heavyweights like Samsung Electronics, SK Hynix, and Tokyo Electron.

Medium-to-long-term fundamentals are strongly supportive; corrections present opportunities. Global AI capital expenditure is still growing rapidly, and the underlying logic of the semiconductor super-cycle remains unchanged. According to forecasts from institutions like Goldman Sachs, cumulative global AI-related capital expenditure (compute, data centers, power) could reach approximately $7.6 trillion from 2026 to 2031, with annual AI CapEx approaching $765 billion in 2026 alone before rising gradually to $1.6 trillion by 2031. New data center capacity additions are expected to total nearly 100GW between 2026 and 2030, with total investment reaching around $3 trillion.

South Korea maintains a strong leading position in HBM (High Bandwidth Memory) and advanced manufacturing processes. SK Hynix's HBM market share has consistently been 50%-62%, and its supply share for NVIDIA's Rubin platform in the HBM4 era could reach around 70%. Samsung Electronics is also accelerating capacity expansion, planning to increase HBM production capacity by about 50% in 2026. The long-term orders for both giants are essentially locked in until 2027, indicating that the super-cycle for AI memory demand is still in its early stages.

From a long-term perspective, AI remains a transformative productivity tool, and periodic adjustments are unlikely to reverse the trend of technological progress. Just like corrections following every technological bubble in the past, they ultimately left substantial returns for true infrastructure builders and innovators. This "Black Tuesday" might mark the turning point for AI investment, moving from frenzy to rationality and from concept to real-world application. The resilience and potential of Japanese and South Korean stock markets remain worthy of anticipation.