Leverage Buildup in Japan, Korea, and Taiwan AI Sectors Amplifies Volatility; Korean Single-Stock Leveraged ETFs Draw Regulatory Warning
Miles Bennett
AI-driven rallies have pushed Japanese, Korean, and Taiwanese equities to record highs, but margin buying has hit a 30-year peak — retail leverage is turning the rally into a spring that snaps both ways.
The Nikkei hit a record and dropped 4% the next day — what happened?
The Nikkei touched an all-time high of 72,366.34 on June 19, then fell 4% to 69,360.88 the following day.
Five trading days in June have seen intraday swings exceeding 3.5% — matching the frequency during April's tariff shock.
This means → the market is not trending smoothly upward; it is flipping between new highs and sharp pullbacks, and volatility itself has become the norm.
Who is driving this rally?
JPMorgan quant strategist Masanari Takada's team found the main force behind the rally is cash equity buying, not futures speculation.
Persistent buyers include passive funds, cash-momentum funds, some medium-to-long-term foreign investors, and Japanese retail traders.
This means → this is not hedge-fund short-term trading but longer-term capital betting on the AI cycle — yet the "fuel effect" of retail margin buying amplifies drops just as much as it amplifies gains.
How large has margin buying become?
As of the week ending June 19, margin-buy balances on the Tokyo Stock Exchange stood at roughly ¥6.5 trillion (about $40 billion), up ¥102 billion from the prior week.
In early June the balance briefly exceeded ¥6.6 trillion — the highest since December 1994.
The margin ratio — credit buys divided by credit sells — has fluctuated between 6 and nearly 8, far above the 10-year average of about 4.
In plain terms = for every yen betting on a decline, six to eight yen are betting on a rise. Leverage is at historically rare levels.
Why is Korea's leverage problem more acute?
Korea's volatility index V-KOSPI briefly topped 95 last week, more than doubling year-to-date and hitting a near-decade high.
Financial Supervisory Service Governor Lee Chan-jin blamed the volatility on single-stock leveraged ETFs tracking Samsung Electronics and SK Hynix.
At a June 22 press conference he said: "Most investors come from middle- and lower-income households; market swings could deal a significant blow to family finances."
This means → Korea's leverage is not institutional; retail investors are using single-stock leveraged ETFs to make concentrated bets on individual chip stocks, creating highly concentrated risk.
Can AI fundamentals support this much leverage?
Aberdeen Investments Deputy Global Head Ray Sharma-Ong noted that Japanese, Korean, and Taiwanese equities span the full AI supply chain — from hyperscalers and chip design to packaging, equipment, and cooling.
He added that the US-Iran ceasefire deal should lower import costs and improve corporate margins, providing additional support.
This reflects the core tension: fundamentals are supportive, but leveraged capital is driving price swings well beyond what fundamentals alone can explain. Any external shock that triggers deleveraging could cause a sell-off disproportionate to the underlying business reality.
Content is for reference only, not financial advice.