The Risk Of A Market-Moving Incident Out Of North Korea Has Increased

The execution of Kim Jong-un’s uncle-in-law, Jang Song Thaek, has been seen as a “confirmation of an ongoing power struggle in Pyongyang,” according to Alastair Newton, Nomura’s senior political analyst.

While jitters out of North Korea are quite common, Newton believes that the risk of a market-moving incident has increased.

The publicity around the execution is, internally, expected to drive home the idea that Kim Jong-un is in control. But there have been reports that indoctrination sessions have increased and people have been required to write letters of support and loyalty to Kim.

Newton thinks that ever since private markets were reinstated, there’s more information about the world trickling in to North Korea and there are concerns about a grass roots uprising. This along with Jang’s execution that has certainly unsettled even the privileged explains why Kim wants more loyalty.

Based on all of this it does seem like Kim is more in control today.

“But I still think regime instability is a significant concern, which is likely to prove persistent,” writes Newton.

The regime also faces external pressures from the U.S. and China to wind down its nuclear weapons programs. And South Korean president Park Geun-hye has said the current situation is “grave and unpredictable,” and is calling for more border vigilance.

Tensions are expected to increase ahead of the upcoming joint South Korea/U.S. military exercises and the birth anniversary of Kim il-Sung when North Korea likes to demonstrate its military prowess.

“[T]he already non-negligible risk of a potentially market-moving incident (or incidents) into the New Year has probably increased,” wrote Newton.

In the long term he thinks the Korean peninsula “looks likely to become an increasingly dangerous place.”

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