The concern is the risk of Kim Jong Un missing the target

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At 6am this morning North Korea conducted a missile test which flew between Hokkaido and Japan’s main island Honshu. The real question is not so much the capability of his missiles but their short comings. The reality is a reasonable failure rate (c.33% in the past 3 years alone) has a high level of risk attached to it, especially when sending them over Japanese land. While most failures have been at the launch pad stage, the risk is that should the tracking and guidance systems fail mid flight over Japan even without warheads, considerable damage could be inflicted. Japan said it would shoot down such test missiles when Trump was threatening to intervene several months back but clearly swerved first in this game of chicken.

While Kim Jong Un’s technology is undoubtedly improving, the risk is that eventually it will reach a stage where he can be a belligerent imp with real capability. Up til now his armaments have been relatively crude. The sanctions put on the $12bn economy, mostly China, are biting. These missile tests would undoubtedly be costing Kim a relative bomb (no pun intended) to conduct. Still allowing his people to suffer isn’t a priority. The saber rattling is no different to his father and grandfather before him. Fire a few missiles, threaten others and get a cash injection to shut up and then go away.

Unfortunately this game of geopolitical chess gets worse as his capability gets better. He has nothing to lose whereas his neighbours stand to suffer relatively catastrophic downside. Tokyo is 125x larger in GDP terms than NK. Seoul 68x.

Does he intend to point one at Tokyo, Seoul, Guam or even Washington DC when he has the capability? This argument that a pre-emotive strike on North Korea won’t happen is getting weaker. China knows its strategic value as a buffer to the US. Bribing Pyongyang by buying its ginseng and coal is a cheap form of diplomacy. Beijing’s stance last month was telling. If the US preemptively strikes China will defend Kim. If Kim does anything stupid then he’s on his own.

Still if you know your enemy will eventually get to the stage it can physically harm you and threatens to do so it makes perfect sense militarily to eliminate the threat before it eventuates. After the capability is reached  the risks are factorfold higher. So for every argument that says conflict won’t happen (odds favor it not) the smarter bets will begin to ponder the growing chance something does.

Korean 5yr CDS have jumped 4bps to 62 today, still below the 70 during last month and well below Kim Jong Un’s first missile test at 120bps. GFC was around 700bps. So markets aren’t panicked just yet but gold back over $1300/oz is pricing it gets worse.

Don’t rule out a modern day Gulf of Tonkin incident. With each of these tests, electronic interference (cyber attack) could be a factor. To justify a retaliatory attack, guiding these missiles to hit a remote paddyfield in Aomori or inside Japan’s territorial waters is possible. China must be concerned about this. Electronic warfare is getting seriously capable. Remember when the Iranian centrifuges mysteriously blew up due to the Stuxnet virus? The virus told the centrifuge computers to spin the motors well above design tolerance such that they exploded.

Conspiracy theory maybe but geopolitics is a dirty game with huge long term implications and the rules are that there are none. Kim’s preemptive strike might not start with his finger on the button.

One comment

  1. I totally agree with you Michael.

    Given the relatively unsophisticated nature of his rockets, the chance of miscalculation is very high.

    I don’t think anyone would question whether it was an accident.

    Like

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