South Korea's 24/7 FX Market Liberalization: A Strategic Move Toward MSCI Reclassification and Capital Inflows

South Korea's recent push to liberalize its foreign exchange (FX) market, including the introduction of 24/7 won trading, marks a pivotal step in its bid to reclassify as a developed market by MSCI. This reform, part of a broader strategy to align with global financial standards, could unlock significant capital inflows and narrow the so-called "Korea discount" that has long persisted between its equities and those of developed markets. However, the path to reclassification remains fraught with challenges, as MSCI has emphasized the need for further progress in areas such as currency convertibility and investor accessibility.

Strategic Reforms and MSCI Criteria

The South Korean government, in collaboration with the Bank of Korea and the Ministry of Economy and Finance, has outlined a roadmap to extend onshore FX trading hours to a 24-hour system by 2026, alongside the establishment of an "Offshore KRW Settlement Institution" to facilitate foreign transactions in Korean won according to Bloomberg. These measures aim to address structural barriers that have historically limited foreign investor access, such as restricted trading hours and a lack of offshore liquidity. A dedicated real-time gross settlement (RTGS) system is also planned to support these reforms as reported.

MSCI's criteria for reclassification hinge on full currency convertibility, removal of capital controls, and robust market accessibility. While South Korea has made strides-such as lifting a short-selling ban in March 2025 and improving short-selling accessibility-challenges remain in areas like investor registration, English-language corporate disclosures, and offshore market infrastructure according to the Korea Herald. According to Bloomberg, MSCI's 2025 Global Market Accessibility Review noted "limited progress" in these areas, underscoring that South Korea still faces significant hurdles before meeting developed market standards.

Capital Inflow Potential and Investor Sentiment

The potential for capital inflows following reclassification is substantial. Analysts estimate that an upgrade could attract up to $24–30 billion in foreign investment, driven by passive funds rebalancing portfolios to include developed markets according to 26 Degrees Global Markets. This aligns with historical trends observed in emerging markets like Brazil and India, where currency reforms and policy stability have historically spurred investor confidence. For instance, after Brazil and India implemented interest rate hikes to stabilize their currencies, the MSCI Emerging Markets Index rose by 6% in early 2025, reflecting improved sentiment as reported by Institutional Investor.

South Korea's own reforms have already begun to bear fruit. Foreign portfolio investment in the KOSPI reached 32% of total market capitalization by July 2025, up from 33% in February 2024, according to U.S. Department of State reports. The government has also increased incentives for foreign businesses, raising its budget for cash incentives to $153.8 million in 2024, a fourfold increase from 2023 as stated in the same report. These measures, combined with regulatory sandboxes and streamlined investment procedures, have positioned South Korea as a more attractive destination for global capital.

MSCI's Stance and the Road Ahead

Despite these efforts, MSCI has maintained South Korea's emerging-market status in its 2025 review, citing insufficient progress in FX liberalization and market accessibility according to KED Global. A dedicated task force has been established to accelerate reforms, with a revised timeline suggesting the country could be placed on the MSCI watchlist as early as 2026 and achieve full inclusion by 2028 as reported by Bloomberg. This timeline reflects the complexity of aligning with MSCI's stringent criteria, which include not only technical reforms but also broader governance and transparency standards.

For investors, the strategic implications are clear. While reclassification remains a work in progress, the incremental reforms are already enhancing liquidity and investor confidence. The government's commitment to a 24/7 FX market and offshore settlement infrastructure signals a long-term vision to integrate South Korea into the global financial ecosystem. However, caution is warranted, as MSCI's recent assessments highlight that structural barriers-particularly in offshore market development-remain unresolved.

Conclusion

South Korea's 24/7 FX liberalization represents a critical milestone in its quest for MSCI reclassification. While the immediate reclassification in 2025 appears unlikely, the reforms are laying the groundwork for a more open and accessible market. For investors, the focus should remain on the government's ability to address remaining challenges, particularly in offshore liquidity and regulatory transparency. If successful, the eventual upgrade could catalyze a surge in capital inflows, transforming South Korea's capital markets and narrowing the valuation gap with developed peers.