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North Korean leader Kim Jong II did not appear at the military parade held yesterday in celebration of the country's 60th anniversary. He had fallen sick in late August and being missing-in-action yesterday sparked speculation that it is serious, with some speculation that he suffered a stroke.

The South Korean won had sold off sharply in August and early September despite widespread talk of sizeable supportive intervention by the central bank. The pressure seemed to be driven, at least in part, by foreign investors liquidating South Korean bonds and stocks. The pace of the selling has eased in recent days and the won has recovered a bit--a net 4.3% gain over the past five sessions.

The market is also feeling a bit more comfortable that the KRW7 trillion (~$6.7 bln) of government debt maturing this week will likely be largely rolled over. There is also talk of relatively healthy overseas demand for the $1 bln in South Korean global bonds being sold this week.

North Korean developments are a new wild card. There had already been some reports suggesting that the regime might be restarting its Yongbyon nuclear reactor. The North Korean situation lacks much clarity at the present. It seems that investors will likely err on the side of caution and not expect much of a change in the status quo until they see some evidence. There are some 23 mln North Koreans and the UN warned 5 months ago of a potential humanitarian crisis stemming from a food shortage. Food shortages may have killed 2 mln people in the 1990s, according to US AID.

The North Korean economy is about 3% the size of South Korea and per capita income is about 6%. Yet a leveraged buy-out, along the lines of West Germany and East Germany, seems beyond the means of South Korea and would likely require significant international assistance. But of course, the timing might not be amendable to policy makers' wishers.

While to some a united Korean peninsula is an appealing vision, to others, like China (and maybe Japan) it is not as unambiguously positive as it may seem to many Americans, for example.

It may be premature to think about a Kim Jong II successor or the likely policies. The cult of personality appears powerful and realpolitik considerations warn that countries will have to negotiate with whomever the successor is and new concessions may be demanded, from both sides. On the other hand, the North Korean regime has been such an international pariah, and so ruthless to its own people, that it is difficult--though not impossible-- to imagine a worse situation. In the mean time, we do not anticipate this development to overwhelm the other drivers of the won in the near-term.

Disclosure: none

Source: Kim Jong II MIA: Impact on South Korean Won?