Stocks Fall on Nuke Test Worries

Long-term Stagnation vs. Short-term Unfavorable Factors-

Facing the unfavorable factor that the North has declared the nuclear test, the Korean financial market is in an extremely uneasy situation.

In particular, in case the North actually undertakes the nuclear test, the stock market and foreign exchange markets will seriously be influenced, analysts say.

The Korean stock market has already been affected.

On October 4, after the North officially announced its plan for a nuclear test on October 3, the Seoul stock market saw the KOSPI and KOSDAQ drop compared to the previous day (October 2) by 22.22 points (1.62 percent) and 9.67 points (1.62 percent), respectively.

The KOSPI showed a small decrease in the morning that day, but in the afternoon dropped more than 28 points, a result caused by the North’s announcement.

Kim Ji-hwan, head of the industry analysis team for Hyundai Securities, pointed out, “The stock market is ushered into a high risk phase. Bad effects by the North’s nuclear test will possibly be long-term. This is too big a problem for stock market to address at one time with ease.”

Shim Sang-beom, researcher at Daewoo Securities, said, “The North’s nuclear test is a bigger issue than the missile launch in the past and it will send stronger shockwaves around the world. We cannot avoid stock prices adjustment, if foreign investors take this issue seriously.”

However, some people say that the North’s nuclear crisis will be temporary, based on the past experiences.

Lee Jong-woo, head of research center for Hanwha Securities, said, “In spite of the unfavorable factor of the North’s nuclear test, stock prices are expected to rise due to drop in international oil prices and the rising U.S. stock market having topped the highest price.”

Will Won Turn To Be Weak-

In foreign exchange market, it is reported that won-dollar and won-yen exchange rate will increase (Korean won going down) due to the North’s nuclear issue. The uneasy situation caused by the nuclear test is being seen as a factor to make won valued down.

Actually, March 2003 saw a sudden rise of won-dollar exchange rate from 1,190 won per dollar to 1,250 won 15 days after North Korea pulled out from the Nuclear Nonproliferation Treaty (NPY) and the relation with U.S. became most strained.

In Seoul foreign exchange market on October 4, won-dollar exchange rate increased 1.20 won from the previous day, and won-yen exchange rate more than three won. During the Chuseok holiday, won-dollar exchange rate in the offshore market exceeded 950 won, recording 953 won.

Lee Yoon-seok, researcher of Korea Institute of Finance, forecasted, “Foreign exchange rates may not be fluctuating until any further action related to the North’s nuclear test is reported.”

ssoo@donga.com legman@donga.com