[Opinion] How Much Have Households in Korea, China, and Japan Invested in Stocks?

Young-ik Kim, Adjunct Professor at Sogang University Graduate School of Economics

Last week, the Bank of Korea announced the 'Q2 Fund Flow'. According to this, the household sector (including non-profit organizations) saw a significant increase in net funds, and the proportion of stocks within household financial assets also rose. Since stock dividend yields have become higher than bank deposit interest rates, this trend is expected to continue, increasing the likelihood of a further leap in the Korean stock market.

In the second quarter, households operated 110 trillion won (deposited in financial institutions or invested in financial products) and raised 46 trillion won (borrowed from financial institutions). The net funds of households, the difference between operation and procurement, amounted to 64 trillion won, a significant increase from 24 trillion won in Q2 last year. This appears to be due to households reducing consumption amid the COVID-19 pandemic and the inflow of government disaster relief funds to households. For the first half of the year, household net funds reached 131 trillion won, far surpassing last year's annual 92 trillion won. Although household debt is high, it also means that financial assets are increasing relatively more.

Accordingly, signs of some improvement in household financial assets relative to financial liabilities have appeared. In terms of balance, as of Q2, households held 4,184 trillion won in financial assets, 2.2 times more than their liabilities (1,939 trillion won). This ratio was 2.1 times at the end of last year. Of course, compared to the U.S. or Japan, the asset-to-liability ratio of Korean households remains very low. In Q2 this year, U.S. households had financial assets 5.7 times their liabilities, and Japan's was 5.5 times, much higher than Korea.

There were also slight changes in the allocation of household financial assets, with the proportion of stocks increasing somewhat. As of Q2, Korean households held 4,184 trillion won in financial assets. Of this, 45.5% was allocated to cash and deposits, 31.9% to insurance and pensions, 3.6% to bonds, and 18.3% to stocks. The stock proportion fell from 18.1% at the end of last year to 16.3% in Q1 this year, then increased in Q2. The rise in stock prices in Q2 contributed, but more fundamentally, as suggested by the 'Donghak Ant Movement', household funds flowed into the stock market. In fact, household stock investments (equity securities and investment funds) increased by 21 trillion won in Q2.

The most important reason for the increase in the proportion of stocks within household financial assets can be found in the dividend yield of stocks surpassing bank interest rates. In August this year, the interest rate on bank savings deposits was 0.8%. However, last year, the KOSPI dividend yield exceeded 2%, and it is expected to be somewhat higher this year as well.

The proportion of stocks in Korean household financial assets is higher than in Japan but much lower than in the U.S. As of Q2 this year, Japanese households allocated 12.8% of their financial assets to stocks. After peaking at 27.5% in 1989 during a stock market bubble, it fell to 7.5% in 2003 and has been gradually rising since. Because of the low stock proportion, the cash and deposit ratio in Japanese household financial assets was very high at 54.7%.

Unlike Japan, as of Q2, the proportion of cash and deposits in U.S. household financial assets was low at 13.8%, while the stock proportion was very high at 47.3%. Even looking at the long-term average since 1960, U.S. households held 42% of their financial assets in stocks. This is why stock prices could trend upward.

A notable aspect of the relationship between the U.S. household stock proportion and stock prices is that when the stock proportion approached 50%, stock prices experienced significant corrections. For example, after the stock proportion rose to 48% in 2000, the stock market bubble burst, and it reached 48% again just before the 2008 financial crisis. At the end of last year, the stock proportion rose to 50%, and stock prices plunged in March this year. Currently, with the U.S. household stock proportion at 47%, exceeding the historical average, it is likely that U.S. households will not increase their stock holdings further. This implies that some further adjustment in the U.S. stock market is needed.

This content was produced with the assistance of AI translation services.