South Korea's money supply surges on strong corporate earnings, raising inflation concerns

South Korea's money supply, measured as broad money (M2), saw a significant expansion in June, growing by 29.4 trillion won to reach 4,213 trillion won. This marks the largest year-on-year increase since February 2023, with a 6.0% rise compared to the previous year. The monthly increase, while slightly smaller than May's 32.2 trillion won, indicates a continued trend of monetary expansion.

The surge in money supply is largely driven by robust corporate earnings, especially within the semiconductor industry. According to the Bank of Korea, non-financial corporations have increased their holdings of short-term liquid assets, contributing to the rise in M2. Specifically, investments in money market funds (MMFs) by corporations saw a substantial jump from 2.5 trillion won in May to 7.3 trillion won in June. Similarly, short-term time deposits (under two years) held by corporations shifted from a decrease of 4.7 trillion won in May to an increase of 7.1 trillion won in June.

Analyzing the components of M2, non-financial corporations and other financial institutions saw their holdings increase. However, household and non-profit organizations experienced a decrease of 19.8 trillion won. This reduction in household M2 is interpreted as a movement of personal funds into stock market investments, as reflected by a 12.3% year-on-year increase in the former M2 measure that includes beneficial certificates.

The narrower measure of money supply, M1, also showed growth, with its average balance increasing by 0.4% month-on-month and 10.0% year-on-year, reaching 1,402.9 trillion won. This continued monetary expansion, fueled by corporate performance, raises concerns about its potential to stimulate inflation.

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The increase in money supply is attributed to the expansion of short-term surplus funds by non-financial companies, leading to an increase in money market funds and a significant rise in corporate holdings of time deposits under two years.