Seoul shares closed 1.2 percent higher on Friday, led by an upsurge in financial stocks on expectations the central bank's surprise interest rate cut would help kick off a recovery in weak domestic spending.
"It's time to focus on companies driven by domestic demand," said Lee Won-ki, the head of research at Merrill Lynch in Seoul. "The rate cut was clearly designed to stimulate local consumption and I believe a turnaround is not far away."
The Bank of Korea cut its overnight call rate target by 25 basis points to a record low of 3.5 percent on Thursday despite signs inflation is building. The move surprised the market, which had expected rates to remain flat for a 13th consecutive month.
The benchmark Korea Composite Stock Price Index (KOSPI) closed 1.22 percent higher at 776.02 points. The index gained 5.7 percent this week. Foreign investors bought a net 197 billion won ($170.3 million) worth of shares on the main stock exchange.
Among leading gainers, financial stocks rose on hopes lower rates would ease overdue debt problems by reducing borrowing costs and boosting liquidity in the market, analysts said.
Shinpan Financial Group, the country's second-largest financial group, ended up 2.6 percent at 19,500 won and Hanna Bank rose 4.3 percent to 26,700 won.
Top credit card firm LG Card soared 12.2 percent to end at 9,360 won, while top brokerage Samsung Securities Co gained 2.8 percent to end at 20,150 won.
Shares in Daelim Industrial climbed 7.0 percent to end at 42,800 won after the mid-sized contractor said it would spend 50 billion won to buyback and cancel 1 million common shares and 400,000 preferred shares by November 16.
The sub-index of builders surged 2.92 percent on expectations for new construction orders, helped by South Korea's plan to relocate the future seat of government from Seoul.
Hyundai Heavy Industries Co, the world's largest shipbuilder, also ended up 3.2 percent at 24,500 won on news it had won a $360.5 million order to build four oil tankers for Kuwait Oil Tanker Company.
Volume stood at 369.6 million shares valued at 2.15 trillion won, compared with 321 million shares worth 1.83 trillion won in the previous session. The junior Kosdaq markets rose 0.77 percent to 346.09.
The September KOSPI 200 futures index rose 1.35 points to 99.55 and the underlying KOSPI 200 spot index rose 1.10 points to 100.15.