North Korea Crisis Hits Asia’s Biggest Economies

Increasing tensions on the Korean Peninsula are already causing economic damage to Asia’s biggest economies, and the cost could worsen in both human and financial terms if tensions are not eased.

In mid-April, North Korea defied warnings against further provocations by conducting its latest missile test. The state reportedly fired an unidentified ballistic missile, which exploded almost immediately after launch,  from the city of Sinpo, according to South Korea’s Joint Chiefs of Staff.

The test came a day after North Korean leader Kim Jong-un oversaw a military parade in Pyongyang marking the 105th birthday of the nation’s founder, Kim Il-sung, the current leader’s grandfather. Along with goose-stepping soldiers, the parade showcased a range of missiles, including submarine-launched ballistic missiles and reportedly a new intercontinental ballistic missile.

Kim has conducted three nuclear tests along with a number of missile launches since succeeding his father as leader in 2011. In March, four projectiles reached as far as Japan’s exclusive economic zone, a move that Japanese Prime Minister Shinzo Abe described as “an extremely dangerous action.”

U.S. Vice President Mike Pence arrived in Seoul the day of the failed missile test for talks as tensions between Pyongyang and Washington continued to escalate.

U.S. President Donald Trump has described North Korea as “a problem [that] will be taken care of,” having earlier ordered the dispatch of the aircraft carrier USS Carl Vinson to the Korean Peninsula, a move seen as putting further pressure on the North Korean regime.

In response, North Korea has vowed to “go to war” against the United States if necessary, stating that “all the brigandish provocative moves of the U.S. … will thoroughly be foiled,” while pledging to continue its missile tests.

Economic Fallout

While North Korea’s provocations could simply be aimed at bringing Washington to the negotiating table, the saber rattling is already having an economic impact.

The Japanese yen, seen as a safe haven in times of crisis, has gained about 3 percent against the South Korean won over the period from April 3, when Trump said the United States could act alone against North Korea if necessary. The yen could climb further should tensions continue to ratchet up, according to Daiwa Securities.

On the Friday before the massive parade and failed missile test, the won dropped 0.9 percent, while the yen ended the week with a 1.9 percent gain against the U.S. dollar, its biggest rise in a month. Japanese stocks have also fallen for five straight weeks – the longest losing streak since December 2015 – while South Korea’s Kospi index was also down 0.8 percent for the week.

The Nikkei Asia300 index also fell by 0.2 percent for the week, with investor mood “dominated by geopolitical developments” including the U.S. missile strikes on Syria and the Korean crisis.

“Won weakness also reflects the risk that South Korea’s relationship with the North will worsen given the candidate who advocates a tougher stance against them is gaining popularity [in the South Korean presidential poll],” Daiwa Securities analyst Yuji Kameoka told Bloomberg News.

“Although Japan wouldn’t remain unscathed should there be military conflict in the peninsula, the yen is still bought when risk aversion heightens globally,” he told the financial news service.

For Japan, a rising yen runs counter to the efforts of its “Abenomics” policies to engender export-driven growth, due to the correlation between the exchange rate, exporter profits, and Japanese stocks.

South Korea has already suffered economic damage over the Korean tensions, due to China’s economic response to its move to install the U.S. Terminal High Altitude Area Defense (THAAD) missile defense system. With China representing South Korea’s largest trading partner, Beijing has flexed its economic muscles through measures such as restricting Chinese tourism to South Korea, closing Korean-owned Lotte stores, and blocking imports of Korean cosmetics and TV shows.

“We don’t have to make the country bleed, but we’d better make it hurt,” China’s Global Times newspaper warned in response to THAAD, which is seen as a threat to China’s national security.

The travel ban alone could potentially cut at least 20 percent off South Korea’s economic growth in 2017, Credit Suisse has warned. The investment bank calculates that Chinese tour groups account for around 0.5 percent of South Korea’s gross domestic product.

The sanctions have hit the stock prices of South Korean consumer firms and they could be set for further damage should the risks rise further, according to political risk consultancy Eurasia.

China could also suffer from the crisis, with Trump reportedly having warned Chinese President Xi Jinping that new sanctions against North Korea could include penalties against Chinese banks and companies doing business with the regime.

“If that’s the only option the Chinese leave us, there’s a real possibility that Chinese entities will get hit,” a U.S. official was quoted saying by the South China Morning Post.

North Korea conducts almost 90 percent of its trade with China, including exports of coal, iron ore and zinc, along with seafood and textiles.

Despite China implementing a ban on North Korean coal exports since February 19, a move aimed at increasing pressure on the regime, the latest data showed a 37 percent increase in Chinese trade with the North in the first quarter of 2017.

Yet China has also warned Pyongyang against further moves that heighten tensions.

“If the North makes another provocative move this month, the Chinese society will be willing to see the United Nations Security Council adopt severe restrictive measures that have never been seen before, such as restricting oil exports to the North,” the Global Times newspaper said.

Beijing officially stated that it “oppose[d] those sanctions that undermine China’s interests,” indicating that Washington should not expect Beijing to squeeze its neighbor into economic collapse, according to the New York Times.

With Asia’s largest, second- and fourth-largest economies all in the firing line, the region’s economic prospects could take a severe battering should the “cold” war on the Korean Peninsula turn hotter. For Asia, the stakes keep on getting bigger in its worst geopolitical crisis yet for 2017.