Why is the Bank of Korea worried about semiconductor bonuses flowing into real estate?

An unprecedented semiconductor "super cycle" has been driving economic expansion and sharply lifting household incomes in South Korea — yet the Bank of Korea's concerns are mounting. Signs are emerging that income gains concentrated in the IT sector, which has benefited most from the semiconductor boom, are flowing into real estate and other assets rather than consumption.

In a Korean economic structure where the so-called "wealth effect" — the tendency for rising asset values to spur spending — remains weak, a concentration of income gains in real estate could constrain consumption, domestic demand and ultimately broader economic growth. Should that happen, both the growth trajectory and inflationary pressure could fall short of the BOK's projections.

The BOK's Monetary Policy Board moved last month to raise the benchmark interest rate for a second consecutive time, acting preemptively against demand-side inflation. But concerns are being raised that the side effects — heavier burdens on vulnerable borrowers and deepening inequality — could outweigh the benefits of the rate action.

The Bank of Korea has been releasing a series of research papers arguing that improvements in South Korea's terms of trade, driven by the semiconductor sector, will lift the country's economic growth rate and inflation over the medium to long term, according to financial industry sources.

On July 19, Lee Jong-ung, a deputy director at the BOK's research coordination team, and co-authors published a report titled "Why Are the Current Terms-of-Trade Improvements Different? The Real-Economy Spillover Effects of the Semiconductor Boom." The report projected that the current improvement in terms of trade is likely to exceed the scale and duration of past episodes, and that favorable trade conditions will persist long enough to sustain robust growth in gross domestic income.

On Sunday, Jeong Won-seok, a deputy director at the BOK's inflation trends team, and co-authors released a separate analysis. It concluded that the sharp improvement in terms of trade driven by the semiconductor boom has expanded households' real purchasing power and that core inflation could continue to rise at an elevated pace.

The very next day, a report co-authored by former research coordination team official Jeong Hui-wan was also made public. Using empirical analysis, it found that the semiconductor industry boom is already having a meaningful positive effect on domestic consumption, and projected that the spillover through consumption channels will expand further as bonus payouts grow larger.

In the span of roughly one month, the BOK sent the same message three times: the semiconductor boom is pushing up both economic growth and demand-side inflationary pressure. The flurry of publications is widely seen as the central bank building a case for why preemptive action was necessary — after the Monetary Policy Board broke with convention last month by raising the benchmark interest rate on consecutive occasions.

The rosy outlook painted in those reports, however, came with conditions attached. Chief among the caveats is that the benefits of improved terms of trade have been concentrated in the IT sector — particularly at companies such as Samsung Electronics and SK hynix — and within that sector, among high-income, high-asset households. Because such households have a relatively low marginal propensity to consume and a weak wealth effect, the domestic demand spillover is limited and could weigh negatively on economic growth and inequality.

One of the reports estimated that in Icheon — a city with a high concentration of semiconductor workers located close to Seoul — a significant portion of performance bonuses was channeled into housing-related spending and real estate purchases in southern Gyeonggi Province. Lee Jae-ho, a deputy director at the BOK's research coordination team, said "conditions must be created so that rising incomes flow smoothly back into consumption and the real economy, rather than into asset markets."

The BOK's wariness about semiconductor-driven income gains flowing into real estate, equities and other assets stems from the fact that the wealth effect in South Korea is currently negative — meaning that as assets grow, consumption actually declines. If money continues to pile into assets under these conditions, the broader economic side effects could worsen. Lee Dong-ryeol, director of the BOK's research department, made the same point at last month's economic outlook briefing, saying, "If spending flows into real estate, consumption recovery could weaken," and adding, "It is difficult to predict which direction the benefits of growth will go."

According to the BOK, since 2000 household propensity to consume in South Korea has actually fallen during periods of rising housing prices — and the decline has been steeper than in other countries. The BOK attributed this to a growing share of what it called "wealthy liquidity-constrained households" over the past decade: families that hold substantial assets but have little cash on hand because most of their wealth is tied up in illiquid real assets such as housing, leaving the consumption-boosting effect of rising asset values diminished.

The same dynamic applies to equities, another major asset class. According to the BOK, Kospi surged more than 75 percent last year, generating 429 trillion won ($312 billion) in household equity capital gains — yet only 1.3 percent of that amount translated into consumption. Furthermore, households without homes were estimated to have channeled roughly 70 percent of their stock market gains into real estate purchases.

Taken together, the picture is clear: whether through real estate or equities, rising asset values are not translating into stronger consumption under the current economic structure.

These dynamics are also emerging as a key variable for monetary policy. The BOK has projected that the improvement in terms of trade driven by strong semiconductor exports is lifting economic growth, and that the resulting demand-side inflationary pressure will begin to materialize in earnest going forward. Last month's consecutive rate hikes were based on precisely that reasoning.

But if performance bonuses and wage increases fail to translate into stronger consumption, demand-side inflationary pressure could come in below expectations. The BOK raised rates preemptively to get ahead of demand-driven inflation — yet if inflation turns out to be more modest than feared, the side effects of the rate hikes could end up being the more prominent story.

The most immediate concern is the interest burden on vulnerable borrowers and small and medium-sized enterprises. The BOK estimated that a 0.5 percentage point rise in lending rates adds 1.12 million won in annual interest costs per self-employed borrower. The Monetary Policy Board justified its consecutive hikes on the grounds of getting ahead of inflation — but if price pressures prove milder than projected, questions will arise about whether the policy was appropriate. The BOK's repeated calls for effective policies to channel semiconductor-driven income gains into the real economy rather than assets reflect the same concern.

The Monetary Policy Board's dilemma is expected to deepen in the months ahead. Governor Shin Hyun-song signaled at last month's post-decision press conference that the BOK would take a wait-and-see approach for the time being, saying, "Because we raised rates consecutively this time, we need to assess the effects."