Asia update: “bounded risks” (let’s hope!) from North Korea, snapping louder in Japan

by Ross D. Schaap PhD and Mark Y. Rosenberg, PhD, GeoQuant

You don’t need an algorithm to get that geopolitical risks are on the rise following North Korea’s alleged hydrogen bomb test on 2 September. Though the crisis was escalating all summer, it clearly has taken a more precarious and unpredictable turn than past rounds of sabre-rattling — and one we did not anticipate in our previous North Korea analyses.

That said, updating our analysis — which tracks and projects geopolitical risks in South Korea, the United States and China as proxies for North Korean risk — reveals some compelling takeaways. As per the graph on the left, note our updated projections (marked by dotted lines) tracked along our index of ‘Great Power’ geopolitical risk (including data from U.S., China, Russia and the EU) to provide a global baseline.

Unsurprisingly, we see a pretty large increase in geopolitical risk for South Korea since the most recent H-bomb test, with smaller upticks for the U.S. and China, respectively. The graph still confirms our previous take that the crisis ultimately remains bounded within the confines of a U.S.-China proxy battle (and literally bounded within the graph) without descent into outright war. But the risks to South Korea and Japan of sustained insecurity and potentially armed conflict are clearly up and growing.

As such — and as per our ongoing analysis — the crisis could also trigger a re-acceleration of U.S. political risk, with bearish consequences for the S&P 500.

Japan passes another snap election signpost

The creation of another new political party in Japan last week offers further evidence that a snap election may be called before the end of the year. The Japan First Party (JFP) is the national progeny of the Tokyo First Party (TFP), which defeated the leading and long-ruling Liberal Democratic Party (LDP) in municipal elections in Tokyo this past July. This rout shook expectations of continued LDP rule (and, by extension, the tenure of current PM Shinzo Abe) after the next general election, which must be called by the end of 2018.

Similarly conservative to the LDP on social policy and hawkish on security policy, the JFP is otherwise somewhat more market oriented — though whether that orientation will be good (i.e. favor competition), or bad (monopolistic/oligopolistic policies), is less clear. But the party’s stance will likely be revealed in the coming year as the TFP takes charge of creating policy and managing systems in Tokyo.

What is clear is that the JFP now poses a greater challenge to the LDP at a national level, which until to this point had the political good fortune of facing an ideologically divided opposition. The JFP’s platform/rhetoric combines a conservative approach to policymaking with anti-establishment messaging designed for mass political appeal — a populist play that does well in urban areas, and takes advantage of the LDP government’s declining mass support.

Consequently, after the drubbing it took in Tokyo, Abe’s LDP would be wise to move before the JFP finds candidates who can effectively compete nationwide. For Abe it’s better to win an election now, even if the LDP will lose its supermajority in the lower house, than to simply lay in wait and hope that prospects improve. In other words: Abe and the LDP need to call an early election to extend their tenure in office before the JFP gains momentum.

Besides providing a first mover advantage over the nascent JFP, an early election would also capitalize on Japan’s recently strong economic performance and the public’s rally-round-the-government response to North Korean security provocations, offering Abe a window that should provide enough boost to secure another national victory. After all, despite steadily falling mass support, elite support for the LDP remains strong, and that presents an impediment to the JFP’s efforts to attract quality election candidates — necessary to pose a serious national electoral challenge in the near term. Again, much will come down to how TFP’s management of Tokyo in plays with the public. If Tokyo’s citizens are happy, their support could mushroom to a national level, and JFP’s influence is only likely to grow. All the more reason, then, for Abe to call an election sooner (expect early December/late January) rather than later.

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