TOKYO — The intensifying nuclear saber-rattling between Washington and Pyongyang has frayed the nerves of the international financial markets.
On Tuesday, the Washington Post cited a U.S. Defense Intelligence Agency assessment stating that North Korea has up to 60 nuclear weapons in its possession, including a successfully miniaturized warhead that can fit inside a missile.
“North Korea best not make any more threats to the United States,” President Donald Trump warned the same day. “They will be met with fire and fury like the world has never seen.”
But the reclusive state immediately thumbed its nose at that red line early Wednesday, when the state-run Korean Central News Agency reported that the military is “examining” a medium-to-long-range missile strike in the area surrounding the U.S. Pacific territory of Guam.
“North Korea is preparing to fight over conditions with the U.S., the assumed negotiating partner, so it is repeatedly engaging in provocations that stop short of truly enraging the U.S.,” said Kazuhisa Ogawa, professor at Japan’s University of Shizuoka.
The heated rhetoric sent investors flocking Wednesday to the yen, considered a safe-haven asset. The Japanese currency surged as high as the upper-109 yen level against the dollar, though it later reversed course and approached 110 yen. Meanwhile, traders were dumping the South Korean won in droves.
The Nikkei Stock Average lost as much as 335 points, a slide not seen in roughly three months, later closing at 19,738, down 257 points.
“Investors have been contacting me while they are at summer resorts,” said Kyoya Okazawa of BNP Paribas, describing the rush of sell orders from his foreign clientele. It was only last month that the market was so quiet that a measure of volatility hit a 36-year low.
The North Korean fear factor also dented other markets across the globe. South Korean equities dove to levels not seen in roughly one and a half months. Benchmarks in Taiwan and Hong Kong tumbled as well. German, French, Italian and other European stocks sank over 1%, while Wall Street’s Dow Industrial Average suffered a repeat down session on Wednesday.
A new normal?
Despite the North’s stepped-up missile tests, global markets had remained relatively ho-hum up to this point. When Pyongyang fired an intercontinental ballistic missile July 4, the Nikkei average only dipped 23 points. A second ICBM on July 31 knocked off a mere 34 points. The consensus then was that Kim Jong Un was engaging in his usual brinkmanship diplomacy.
This time, not only has North Korea spelled out a specific target in Guam, but many believe Trump, dealing with a stalled domestic agenda, may try to score points by taking a much tougher stance on the regime. In fact, a new poll has emerged showing that a majority of Americans support sending troops to defend South Korea in the event of an invasion by the North.
“This changing mood feels like the crisis level has been raised on the market by one order of magnitude,” said Shingo Ide at NLI Research Institute.
In addition, global shares were already poised for a selloff because of the mounting impressions that prices are overvalued. Some investors “are using the North Korean risk as an excuse to lock in profit,” said Takeshi Kamoshita at Asset Management One.
However, only a minority of observers see international shares going on an extended downfall, due to the generally healthy economic fundamentals across nations. “Robust corporate earnings are propping up [prices], and the downturn will likely be short-lived,” predicts Juichi Wako at Nomura Securities.