North Korean provocations are not the new wildcard in Asia

By Ross Schaap PhD, Head of Data & Analytics @GeoQuant

Though North Korean nuclear and missile tests attract global coverage, it’s in northeast Asia that we should always expect an immediate impact on politics and markets. But after decades of provocations from North Korea, “a boy who cried wolf” effect has settled in — and these incidents now fail to produce much more than noisy distractions. Adding President Trump and his unpredictable temperament into the mix of course raises concerns of alarming behavior from a new source. But that possibility hasn’t been terribly disruptive — at least not yet.

South Korea

In South Korea the KOSPI is up strongly on the month and year, perhaps reflecting an end to the political crises surrounding now deposed President Park — and clearly at odds with geopolitical risk from the north. Indeed, political risk has recently fallen in South Korea, as evidenced by significant declines in our GeoQuant governance risk score since Park was forced from office in March. Moreover, although our security risk score had been rising since November, it’s fallen more recently, suggesting that currently the Trump wildcard has shaken up the situation more than this current round of missile tests.

Japan

Given historical grievances with North Korea, the Japanese could legitimately be most at risk. But financial markets in Japan are up nevertheless, and even the country’s previously rising security risk has recently shifted downwards. While its governance risk is rising, that is likely more a reflection of the slow drip scandals revolving around Prime Minister Abe that culminated in his ruling Liberal Democratic Party (LDP) getting routed in Tokyo municipal elections a few weeks back. Tokyo elections are considered a harbinger of national political trends, putting Abe’s continued tenure as PM in jeopardy ahead of the party leadership contest in September. Though Abe will likely prevail, it’s these domestic forces that are driving political risk there — not North Korea.

China

China is least at risk of direct North Korean provocations, but these events do bring pressure on Beijing to sanction North Korea. Yet, even in China, the risks to governance and security have fallen over the last couple months and — despite calls from the international community — China is unlikely to end its support for Pyongyang anytime soon.

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