Asia hogged the spotlight yesterday as news centered on the growing tension between North and South Korea. Word on the street is that South Korean officials sent a text message saying, "You sank my battleship!" across the border. Ok, fine, it was much more serious than that and you can bet your bottom won that North Korea didn't take it too nicely!
In a statement released yesterday, North Korea officials said that they would be cutting all ties with their southern counterparts. In addition, North Korean leader Kim Jong Il apparently put the military on red alert while the US pledged to help South Korea with anti-submarine exercises to bolster defense against a potential war in the Asian seas.
Some believe that the news shouldn't be taken as another catalyst for risk aversion since the threat of war isn't unusual in the area. Indeed, in the past, news of potential sibling warfare between North and South Korea would lead to some bearish moves for the yen, but that didn't really happen yesterday.
Still, as a wise old man keeps reminding me, these are unprecedented times - no one knows what's going on! With that said, I think that this is an issue that we should at least pay some attention to. If the situation isn't handled properly and the tension boils over to other Asian nations, I feel that it could cause major implications to the road to recovery.
Remember, over the past year, it has been Asian countries that have led global growth. After the US, the next three individual countries that contributed the most to the world GDP in 2009 were China, Japan, and India. Almost a quarter of the world GDP came from three countries in Asia! Here's a neat visual for ya'll:
Given Asia's crucial role in the world economy, current threats to the region could also derail global recovery. The ongoing military strife in Korea puts its neighbors (ahem, China and Japan) at risk, which could then discourage people from investing in Asia. This could cause credit conditions to tighten and capital markets to freeze, putting a strain on Asia's economic activity.
On top of that, the possibility of a debt contagion could dampen trade and economic activity in Asian nations, eventually putting a drag on other economies as well. Uh oh, it looks like Asia isn't so invincible after all...With the euro zone grappling with debt issues, the UK attempting to trim its public deficit, and the US still recovering from asset bubble burst, is global economic recovery left in the hands of the relatively stronger Asian nations? It looks like this latest set of problems is going be a huge test of Asia's strength!