North Korea nuclear test -- Helps SE Asia markets

October 11, 2006

On Monday, North Korea announced a successful underground nuclear test explosion, three days after the UN Security Council specifically forbade it.

Nevertheless, the world community quickly denounced the action. The UN Security Council agreed unanimously, as U.S. Ambassador John Bolton said, “on the need for a strong and swift answer to what everyone agreed amounted to a threat to international peace and security”.

Japan announced it will seek sanctions at the UN. China stated it remains steadfastly opposed to nuclear proliferation, and asked North Korea to return to the six-party talks.

What It Means:
North Korea’s timing couldn’t have been worse for them. This week, the new prime minister of Japan, Shinzo Abe, is on a previously scheduled goodwill trip to meet with President Hu Jintao of China and President Roh Moo-hyun of South Korea.

The original purpose of the trip was to heal wounds left by the previous Prime Minister, Junichiro Koizumi. Both China and South Korea are upset that Koizumi insisted on visiting the Yakasuni war heroes’ shrine which includes 14 convicted Class-A World War II war criminals. 

As a result of Koizumi’s visits, China has not allowed any official visits of Japanese leaders to China in five years. Korea also asked that Abe work towards revising Japanese textbooks to accurately relate Japan’s use of sex slaves in the countries they captured during World War II.

Abe is healing these wounds to begin a new business alliance with Japan’s most important Southeast Asian trade partners. Abe also would like their compliance with his wishes to increase Japan’s defense capabilities. Both countries are understandably nervous about a rearmed Japan.

However, the possibility of a nuclear-armed North Korea was the topic of conversation during Abe’s trip. This may be enough to cause China and South Korea to work through their differences with Japan, and form a new alliance against their northern neighbor.

This alliance would be very powerful, since Japan and China are the second and third largest economies in the world, and South Korea’s Foreign Minister Ban Ki-Moon was nominated to be the new UN Secretary-General in January.

China and South Korea have been fairly supportive of the North Korean government, but only because they are terrified that a collapse would inundate them with thousands of needy refugees. However, the threat of nuclear proliferation now outweighs that concern.

Action Steps:
This alliance would be between the second and third largest economies in the world (Japan and China), and the three most successful economies in Southeast Asia. Therefore, review your Southeast Asia mutual fund allocation and talk to your financial planner about increasing it.

Source: U.S. State Dept. web site, Korea.net, Asahi Shimbun web site, People’s Daily Online web site