The North Korean Crisis and Its Impact on the Global Economy

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The North Korean Crisis and Its Impact on the Global Economy

Tensions between the secretive North Korean state and the United States have been a topic of major global concern in the past few weeks. North Korea has been making a big show of what it perceives to be its military might, with a major display of troops and missiles taking place in Pyongyang in order to celebrate the nation’s 105th anniversary.

Tensions

Current leader Kim Jong-un is the grandson of the North Korean founder Kim Il-sung, with Kim Jong-un’s father Kim Jong-il the leader in between the two, making North Korea a dynasty. North Korea is famous for being isolated from the news, both coming in and out of the country, even over the border with democratic South Korea. Tensions within the Korean peninsula itself are not trivial, either, with a presidential poll in South Korea indicating the rise in popularity of an anti-North candidate.

North Korea is a Stalinist Communist state, and sees itself as an enemy of the USA, recently vowing that they will go to war with Trump’s America if they have to. A statement from Kim Jong-un has been quoted as saying that “all the brigandish provocative moves by the US will thoroughly be foiled.” Trump, however, has said that North Korea is a “problem that will be taken care of,” and has flexed America’s military muscle somewhat too, by ordering the USS Karl Vinson aircraft carrier to be dispatched to the Korean peninsula.

North Korea also has issues with Japan, with missile tests performed by North Korea in March causing four military projectiles to enter the economic zone. Shinzo Abe, the Japanese Prime Minister, reacted by calling the move “an extremely dangerous action”.

Weapons Testing

North Korea has been conducting nuclear tests since 2011 when Kim Jong-un took over leadership from his late father, as well as testing missiles. Some believe all of these shows of weapon power may simply be intended to provoke the US and spark negotiations, however the combination of the increasing tensions between North Korea, its neighbor Japan and the West, plus the displays of North Korea’s nuclear and military resources are troubling to say the least.

With analysts unsure as to what North Korea’s objectives are, and things threatening to escalate quickly, the North Korean situation is already starting to impact the markets and have effects on the global economy—especially in Asia where investors have been preoccupied with military and political factors in recent weeks, with the tensions from North Korea and the US air strikes on Syria.

Investors Look to The Japanese Yen as a Safe Haven

One of the first signs that investors in the Asian markets are lacking confidence is a rise in demand, and therefore the price of the Japanese yen. The yen is seen as a safe haven currency investment, much like when investors put money into precious metals. The yen has increased in price against the South Korean currency—the won—by about three percent on average since early April, indicating that investors are seeing a need to put money into safe havens in the current climate. Asian market experts such as Daiwa Securities predict that the yen will make further gains if tensions continue to ramp up in the coming weeks.

While this may sound like a good thing for Japan, Prime Minister Shinzo Abe has actually been striving for economic strategies that keep the price of the yen down in order to foster more export related growth. A weak yen is actually favorable in terms of what is known in financial circles as ‘Abenomics,’ which aims to drive up stock prices and profits for Japanese exporters.

US Trade Relations with China Could Also Be Affected

Another Asian economy that could be heavily impacted by the crisis with North Korea is China. China’s position is ostensibly against North Korea, and there has been a ban in place on importing coal from North Korea since February. China has warned North Korea against taking actions that further increase tensions with the rest of the world, however they did show a 37 percent trade increase with Kim Jong-un’s state in the first quarter of this year. Trump does not approve, and has stated that as US sanctions against North Korea are implemented, Chinese banks and businesses who deal with North Korea may be penalized.

Around 90% of North Korea’s international trade is carried out with China, and so if China chooses to further restrict trade with them, then this could put a huge amount of pressure on Kim Jong-un. However, Beijing has stated that while it was prepared to see the UN implement restrictive moves such as restrictions of exports of oil to North Korea, it would be opposed to any sanctions that undermine Chinese interests. What has been taken away from this is that China is not willing to go as far as willfully causing economic collapse in North Korea.

The effects of the North Korean situation on their trade, currencies and share dealing have an impact all over the world thanks to their dealings with China, Japan and South Korea, which have significant repercussions on international financial markets. Equally, as the US seems to be prepared for the eventuality of the ‘cold war’ with North Korea turning quite quickly into an actual war, America’s economy—and therefore the economy of the West—is far from safe from significant North Korea related volatility.

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