Stock markets in Japan, South Korea, and Taiwan were plagued by volatility last month, gyrating between all-time highs and sharp selloffs. While the artificial intelligence boom has turned these markets into winners so far this year, it has also encouraged investors to build up leverage, contributing to the market fluctuations.
Japan’s benchmark Nikkei Stock Average, led by tech stocks that are indirect beneficiaries of the AI bubble, hit a record high of 72,366.34 on June 25, before falling 4% to 69,360.88 on June 26. While the blue-chip gauge soared nearly 80% in the past year, its volatility index ticked up and intraday swings grew wider.
So far in June, the Nikkei average has had five days when the trading range exceeded 3.5%. This is the highest such frequency since April 2025, when daily ranges also topped 3.5% on five occasions after the announcement of US President Donald Trump’s “Liberation Day” tariffs.
One key feature of the current market, according to a note by JP Morgan, is that “momentum is being driven more by cash equities than by futures.” In other words, long-term investors, not speculative hedge funds, are driving the boom.
During high volatility, commodity trading advisers (CTAs) and other trend-following investors tend to scale back positions for risk management reasons, the note says. CTAs use statistical analyses to identify market tendencies and build up positions.
“It is therefore difficult to say that mechanical, index-following flows are playing a dominant role in driving the market higher,” quantitative strategist Masanari Takada of JPMorgan Securities Japan and his team said in the note.
Consistent buyers of Japanese stocks, according to Takada, “appear to be passive funds, cash equity momentum funds, some mid-to long-term foreign investors, and Japanese retail investors.” He also said “margin buying—largely driven by individuals—has expanded,” which “serves as fuel during upward moves, as well as amplify price swings during short-term corrections.”
A margin transaction is when investors borrow money to buy stocks. As individuals chase gains from the AI-led market surge, they are ramping up leveraged bets.
Tokyo Stock Exchange data shows that outstanding margin buying for the week through June 19 reached nearly JPY 6.5 trillion (USD 40 billion), JPY 102 billion (USD 627.5 million) more than the previous week. In early June, the margin buying totaled more than JPY 6.6 trillion (USD 40.6 billion), marking the highest level since December 1994.
The margin ratio, which compares investors buying stocks on credit with those betting against them, has also jumped in recent weeks, ranging between six to a little under eight. Compared with the ten-year average of around four, the ratio has risen significantly as more investors skew toward buying.
Memory maker Kioxia Holdings has a ratio of 12, while cable maker Fujikura, which is riding the data center boom, has a ratio of over 20.
The bullish movements have been driven by strong earnings and positive growth outlooks for tech companies.
Along with the US, “Japanese, Korean, and Taiwanese equities provide important exposure to the AI and semiconductor investment cycle,” said Ray Sharma-Ong, deputy global head of multi-asset bespoke solutions at Aberdeen Investments, in a note.
He said the investment cycle spans hyperscalers, chip designers, foundries, high bandwidth memory, advanced packaging, semiconductor equipment, networking, power management, and cooling systems.
The recent ceasefire and interim peace deal between the US and Iran are also working in favor of these markets, he said, adding that “Japan, Korea, and Taiwan will gain from lower import costs and stronger corporate margins, reinforcing the existing tailwind from AI and semiconductor investment.”
The rise in leveraged bets has been more pronounced in South Korea, where the benchmark KOSPI continues to log massive ups and downs. This was visible when the V-KOSPI volatility index topped 95 in mid-June, more than tripling this year and reaching levels not seen in the past decade. With these volatility indexes, higher numbers reflect higher expectations for big, rapid price swings.
One of the main reasons behind the volatility, according to the country’s financial regulator, is single-stock leveraged exchange-traded funds (ETFs). Lee Chan-jin, governor of the Financial Supervisory Service, expressed regret for being unable to block the launches of such ETFs, which track market heavyweights Samsung Electronics and SK Hynix.
“Although the FSS recently issued a consumer alert, the market has not cooled down,” he said during a press conference on June 22. “Since most investors are from the middle class and lower-income groups, market volatility could deal a major blow to household finances, so we are considering additional safety measures.”
In tandem with its heightened volatility, the KOSPI was up more than 170% over the past year before falling nearly 6% on June 26. The enthusiasm has spilled over into the property market, with South Koreans using gains from equities to purchase real estate in search of more stable long-term returns.
From January through April, the portion of stocks and bonds used in home purchases increased to 6.6% in Seoul, up from 3.7% last year, according to government data offered by lawmaker Kim Jong-yang of the opposition People Power Party. In Gyeonggi province, which surrounds the capital, the share increased to 3.9% from 2.4%.
Some experts point out that equity markets in South Korea and Taiwan are more heavily influenced by a small number of large stocks, which could pose risks.
“Emerging markets are increasingly being driven by a small number of large technology-related names,” said Christoffer Enemaerke, portfolio manager for the emerging markets equity team at RBC BlueBay Asset Management.
In South Korea, memory makers Samsung and SK Hynix together account for more than half of the market, while in Taiwan, Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest chipmaker, makes up more than 40%.
Enemaerke noted that emerging markets have become “unusually concentrated,” and that TSMC, Samsung, and SK Hynix together “represent more than a quarter of the EM index, making concentration a serious issue for active managers and allocators alike.”
Data shows a 170% jump in margin buying on the Taiwan Stock Exchange compared with a year ago. Outstanding purchases last week reached over NTD 611 billion (USD 19 billion), which the exchange confirmed was the highest on record.
Leveraged investors are betting on index heavyweight TSMC, with its margin ratio—defined as short positions relative to margin buying—falling to near zero from just under 2% in early January. In Taiwan, the ratio is calculated differently, and a lower percentage indicates stronger buying. This could amplify declines if market sentiment shifts.
Back in Japan, some analysts see further upside despite growing concerns of rising leverage and the risk of volatility-driven downturns.
Based on an analysis using the MSCI country indexes, Morgan Stanley MUFG Securities found that Japanese equities “exhibit significantly lower concentration risk at the individual stock level” compared with the US, South Korea, and Taiwan.
In a June report led by equity strategist Sho Nakazawa, the broker said Japan offers exposure to AI and technology themes while being less dependent on a small number of stocks or sectors. “Combined with stronger risk-adjusted EPS growth,” the report says, “Japanese equities offer a more diversified investment opportunity with steadier earnings growth characteristics.”
This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.
Note: JPY figures are converted to USD at rates of JPY 162.55 = USD 1 based on estimates as of July 2, 2026, unless otherwise stated. USD conversions are presented for ease of reference and may not fully match prevailing exchange rates.