What North Korea's missile tests mean for markets

Equity markets were rattled, and oil and gold prices surged, all because North Korea chose 4 July to test-fire missiles into the Sea of Japan. This latest provocation from the Stalinist state, which claims to have produced nuclear bombs, prompted international outrage and widespread debate on the motives of the Hermit Kingdom's' leader, Kim Jong Il. Regarded by the West as an irrational, "nuclear-obsessed" madman, as the FT's Anna Fifield points out with a taste for cognac, caviar and women he is said to be a strategic thinker by those who have met him.

The launch demonstrated Kim's ability to play a weak hand well. The North Korean economy is a basket case and the government isolated, "but he has flexed his military muscles", forcing the Bush administration to put this member of its "axis of evil" on the front burner.

Kim has "blasted a hole" in the multilateral efforts by China, Japan, Russia, South Korea and the US to persuade the regime to give up its bomb building, says The Economist. North Korea wants to be treated like Iran, which has been offered "a superior list of enticements" from a variety of countries to give up its nuclear programme. The move was also a "rocket-fuelled raspberry" to Washington, which recently cracked down on North Korean drug running and dollar counterfeiting, a major source of revenue for Pyongyang.

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But US efforts will be pointless unless China puts pressure on its neighbour and client regime. The Economist argues that it is time for China to shoulder "some real responsibility for security in East Asia", by withholding some of its largesse that keeps the North Korean regime afloat. Perhaps it will soon get tough, as Niall Ferguson points out in The Sunday Telegraph. Chinese prime minister Wen Jiabao had explicitly warned North Korea not to heighten diplomatic tension; with his latest act, the "Dear Leader" has hardly endeared himself to his patron.

China will be infuriated that it now faces the real prospect of a Japanese military build-up, says The Times. The missile tests look set to prompt a shift in Japan's defence policy to a more proactive "sword and shield" approach. That would alter the military balance of the entire region. So it is in China's own interests to clamp down on the "immoral and intransigent" North Korean regime.

by Graham Buck