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Yen, South Korea Stocks, Won Fall on North Korea Nuclear Test

By Jake Lee and

Oct. 9 (Bloomberg) -- The Japanese yen and South Korea's stocks and currency declined after the North Korean government said it had carried out its first nuclear weapons test, defying calls for restraint from world leaders.

The yen fell to 119.13 against the dollar at 12:19 a.m. Tokyo time, from 118.83 before North Korea's government- controlled news agency reported the test. South Korea's Kospi slumped 2.7 percent to 1315.41. The won dropped 1.1 percent to 959.40 in Seoul, according to Barclays Capital.

``This is negative for economic activity in North Asia and clearly is yen negative,'' said Tony Morriss, a currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. ``The fact that North Korea has gone and done a nuclear test adds to a new level of uncertainty in that part of the world and the U.S. dollar will benefit from safe haven flows.''

North Korea, which announced plans for the test on Oct. 3, now faces the prospect of a United Nations resolution that may include the threat of military action. An Oct. 6 UN statement, drafted by Japan, expressed the Security Council's ``deep concern'' about any test and said it would be a ``threat to international peace and security,'' the standard for future Security Council action.

The yen reached 119.16, its lowest since March 13. Should the currency decline through its year-high of 119.40 per dollar it will drop to 121 in coming weeks, said Morriss.

North Korea has ``safely and successfully conducted an underground nuclear test,'' the official Korea Central News Agency said. ``The nuclear test, conducted in a scientific method and under specific calculations, did not cause any danger.''

The South Korean presidential office began an emergency security meeting of its ministers at 11:30 a.m., according to officials at the presidential Blue House, the Foreign Ministry and the Defense Ministry said in a statement.

Nuclear Talks

Japan's currency slipped to a seven-month low against the dollar last week after Japanese Vice Foreign Minister Shotaro Yachi on Oct. 5 said in Washington that the communist nation may explode a bomb in coming days.

The U.S. and Japan have been joined by South Korea, China and Russia in talks with North Korea aimed at getting the communist nation to scrap its nuclear program.

The won slumped as much as 1.1 percent on July 5 after North Korea fired missiles over the Sea of Japan. Foreign investors have sold $5.9 billion more Korean stocks than they bought since North Korea tested the missiles, including a long- range Taepodong-2.

``A nuclear test is different from just firing missiles,'' said Yang Jeung Won, who oversees about $2.1 billion as chief investment officer at Samsung Investment Trust Management Co. in Seoul. ``North Korea is making its neighbors very nervous because unlike before, they don't look that eager to talk things out.''

Default Risk

The risk of owning South Korean bonds surged. The price of credit-default swaps based on $10 million of South Korea's dollar-denominated debt rose to $26,000 per year from $24,100 Sept. 6, according to data compiled by Bloomberg. It was the biggest increase in 16 months.

The five-year contracts, which protect bondholders against default, pay the buyer face value in exchange for the notes should the government fail to meet its obligations on time.

``The obvious victim of this nuclear test is the won, because of the country's close proximity to North Korea, and Japan will suffer too,'' said Nizam Idris, a currency strategist in Singapore at UBS AG.

Samsung Electronics Co., the most valuable company in the Kospi, fell 13,000 won, or 2 percent, to 635,000. Hyundai Motor Co., the nation's biggest automaker, lost 1,100 won, or 1.4 percent, to 78,100.

To contact the reporter on this story: Jake Lee in Hong Kong jlee127@bloomberg.net

Last Updated: October 8, 2006 23:27 EDT
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