Taiwan has just vaulted past India to become the world’s No. 5 stock market, powered by an AI boom that’s fused investor frenzy with the dominance of the planet’s most critical chipmaker.
The catalyst is unmistakable: Taiwan Semiconductor Manufacturing Co., up 46% this year, pulling the entire market — and the economy — upward with it. TSMC alone accounts for about 42% of Taiwan’s benchmark, which has now swelled to US$4.95 trillion in market value.
Only the US, China, Japan and Hong Kong sit higher. With AI demand accelerating and semiconductors at the center of the surge, Taiwan’s position looks anything but accidental — and hard to bet against.
Taiwan’s boom looks unstoppable — as long as the AI tide lifting all of North Asia keeps rolling. Right now, the self-governing island’s economy reads like a leveraged wager on AI demand, and the numbers make that hard to deny.
Taiwan’s exports jumped 39% year‑on‑year in April, and investors still shrugged because March delivered an eye‑popping 62% surge. Semiconductor shipments climbed 40.5%, while the broader machinery and electrical equipment category — roughly 84% of all exports — expanded 48.7%. Over the first four months of the year, Taiwan exported $263.35 billion in goods, up 47.8% from a year earlier.
Strong chip demand is overpowering weak domestic spending, and the negative effect the Iran-war-driven inflation is having on household confidence. The result: Taiwan’s economy blasted ahead at 13.7% in the first quarter, its fastest pace since 1987.
Taiwan, more than almost any economy besides South Korea, is all‑in on the AI boom. TSMC sits at the center of it — its fortunes now virtually indistinguishable from global demand for AI hardware — making it the economy’s beating heart.
That centrality has turned Taiwan into a kind of toll booth on the road to AI, collecting value every time the world upgrades its computing power.
Korea shares a similar dynamic. The Kospi is on a tear, up 91% this year, powered by chip titans SK Hynix and Samsung Electronics, which have surged 215% and 149%, respectively.
The Kospi’s head-spinning rally has some investment bank analysts, including those at Citigroup, wondering whether then-Federal Reserve Chairman Alan Greenspan’s 1996 warning of “irrational exuberance” might apply to Korea.
In a recent report, Citi writes that it’s too early to predict a huge correction in Seoul. Yet, Citi warns, the “Kospi appears significantly more overbought compared to the US market,” and a “prudent approach would be to take profits on half of the positions.”
The rally is already giving President Lee Jae‑myung some breathing room. His pledge to end the long‑lamented “Korean discount” suddenly looks more plausible. One clear beneficiary is the National Pension Service, whose finances have “significantly stabilized,” notes analyst Jun Young Choi of Yulchon.
The fund’s assets — 1,212 trillion won ($805 billion) at the end of 2024 — jumped to 1,458 trillion won ($970 billion) in 2025 as markets surged. Earlier this month, they even approached 1,800 trillion won ($1.2 trillion).
“This explains why concerns about pension depletion have temporarily subsided,” Choi writes in an op-ed for The Chosun Daily.
But, Choi cautions, “the problem is that no market rises forever. Pessimists note that excessive optimism and speculation during technological shifts have repeatedly created bubbles. Examples like the 1920s radio boom, the late 1990s internet frenzy, and subsequent crashes heighten caution. The October 1929 US stock market crash pushed ordinary citizens, fearing they’d miss wealth-building opportunities, to the brink. It remains unclear whether the current rally marks a bubble’s peak or the dawn of a new era.”
Even Japan is catching a YOLO halo effect. Its electronics makers, machinery firms and banks are all riding the AI trade’s momentum, pushing the Nikkei 225 to record highs above 67,000 (it’s now around 65,800).
The surge is strong enough that BofA Securities is cautioning about a possible short‑term correction by June, especially as fallout from the Iran war cools risk appetite and takes some lift out of the AI trade. Others see Japan’s gains as the payoff from years of corporate‑governance reforms and competitiveness upgrades.
Analyst Kirsten Chang at ETF Trends argues that while the US wrestles with shifting Federal Reserve policy, “Japan has found a Goldilocks balance: moderate inflation and a remarkably smooth exit from negative interest rates by the Bank of Japan. This stability has positioned Japan as a rare safe haven with growth, leading to the first collective global re-weighting to overweight in 20 years.”
Whether Japan remains a safe harbor will hinge heavily on whether US President Donald Trump can find a way out of his war with Iran. With 95% of Japan’s oil coming from the Middle East and the yen “grossly undervalued,” as Eurizon CEO Stephen Jen puts it, Asia’s No. 2 economy is highly exposed.
By some measures, the yen’s real effective exchange rate in April fell to its lowest level since Japan shifted to floating rates in 1973. This means that heading into 2027, Japan will be importing energy, food, construction inputs and other key commodities amid a weakening currency and a rising dollar.
Meanwhile, Taiwan’s rally looks even more astonishing once you factor in demographics: a 23‑million‑person economy outpacing giants despite having less than 1/60th of India’s population.
Regulatory shifts in Taipei may add even more fuel to the fire, especially for TSMC. Taiwan’s financial regulator has raised the cap on how much a domestic equity fund can put into a single stock.
Funds can now allocate up to 25% of their net assets to any company whose weighting on the Taiwan Stock Exchange exceeds 10%, up from the previous limit of 10%. At the moment, only one company qualifies: TSMC.
Taiwan is weathering the war in the Middle East far better than India. Prime Minister Narendra Modi’s economy is being squeezed by soaring energy costs, weak corporate earnings and a shortage of companies tied directly to the data‑center buildouts powering the AI boom. The rupee recently fell to an all-time low.
By contrast, Taiwan — despite the geopolitical uncertainty surrounding China’s intentions and Washington’s commitment to defend it — is structurally aligned with the AI cycle. Lai Ching‑te’s economy sits squarely in the slipstream of global demand, with the semiconductor sector giving it a far stronger position to ride the wave.
“Taiwan’s rising market capitalization is fundamentally a reflection of its heavy concentration in tech hardware, which is currently at the center of the AI investment cycle,” Yi Ping Liao, a fund manager at Franklin Templeton, tells Bloomberg. “Markets with limited exposure to tech hardware are increasingly being overshadowed by tech hardware–heavy markets such as Taiwan and Korea.”
That is, assuming the wave continues to move forward. The worry is that if the AI trade takes a breather, today’s valuations could collapse amid a frenetic race to file “sell” orders.
Then, investors’ attention could pivot back to pre-existing economic conditions. Taiwan, Japan and South Korea all should be riding the tailwinds generated by China’s growth and AI to reinvigorate economic reforms.
Goal one: diversifying growth engines away from exports. Twenty-five years of all three economies pledging to recalibrate economic models away from exports toward domestic demand haven’t gone particularly well. Nor are Lai, Japanese leader Sanae Takaichi or Lee rolling up their sleeves to recalibrate growth engines.
The problem for Taiwan could be complacency. Lawmakers seem to think the AI trade will offset the economy’s challenges forever and spare them the hard work of boosting competitiveness.
“Overall, Taiwan is currently in a structural growth phase driven by the AI technology revolution,” says Xav Feng, a researcher at LSEG Lipper Asia Pacific.
“In the short term, exports, investment, and economic indicators are all reaching new highs simultaneously, indicating strong economic momentum. In the medium to long term, Taiwan’s key position in the global semiconductor and AI supply chains enables it to continuously benefit from the expansion of technology capital expenditures. Supported by the AI supercycle, Taiwan’s economy is moving toward a new phase of high growth and high value-added development.”
Yet the words “continuously benefit” are doing a lot of work in this argument. Aside from market froth, the Strait of Hormuz closure is disrupting chip supply chains. Asian chipmakers, including giants TSMC and Samsung, are facing disruptions to their supplies of oil and other essential commodities.
In the short term, blocked shipments of oil and gas cause “ruptures to the very long supply chain containing oil’s downstream derivatives,” says Roger Sheng, vice president of research at the tech consultant Gartner.
Yet the AI universe must also worry about the shortage of goods needed to make chips like bromine, helium, sulfur and a broad range of thinners.
All of this will matter more and more to Taiwan, which imports more than 95% of its energy. Key sources of its overall energy mix, like LNG, are far more difficult to store than oil or coal.
On average, Taiwan only has an 11-day reserve on hand. This is a key vulnerability for a place that produces around 90% of the world’s most advanced chips. It does not require much imagination to think about the many ways the globe’s AI toll booth could soon be due for a reckoning.
Follow William Pesek on X at @WilliamPesek
