Sovereign risks of Northeast Asian economies ― South Korea, Japan and China ― are increasing as North Korea ratchets up its threats against the allied forces of South Korea and the U.S.

This heightened regional tension may further drive local stocks and currency to spiral downward going forward as North Korea’s unpredictable bellicose action is undermining investors’ sentiment, analysts said.

South Korea, given its closest proximity to the North, has seen its sovereign risk on state bonds measured by credit default swap premium, or the CDS premium, rise the highest among the Northeast Asian countries by 24.26 basis points to 87.90bp over the last month. The U.N. Security Council imposed tougher sanctions on the communist state on March 7 over its nuclear weapons test.

The premium is a gauge of the sovereign risk of countries.

The CDS premium risk of China, the closest North Korean ally which has called for dialogue in resolving the tension despite the North’s nonchalance, increased by 12.34bp to 74.53bp in the same period, according to SuperDerivatives, a global derivatives data service provider.

Japan’s sovereign risk on its state bonds shot up 12.07bp to 75.07bp as the world’s third largest economy, also a strong ally of the U.S., is within the range of the North’s long-range ballistic missiles.

Analysts said that South Korea’s fundamentals remained intact to buffer volatility, but the sharp rise in CDS premium on escalating geopolitical tension still raised concern.

“Geopolitical uncertainty on the peninsula and in the region is arising from the dynastic change in Pyongyang that has resulted in the inexperienced but bellicose leadership (of 30-something Kim Jong-un),” Moody’s Investors Service said in a report.

“During this ongoing episode of heightened tensions, optimism over the new Park Geun-Hye administration’s economic policies evidently surpasses fears over Pyongyang’s saber rattling.”

The incumbent administration has recently unveiled a set of economic measures to revitalize the sluggish job and real estate markets through proposed tax cuts and deregulation.

Moody’s added that the strong alliance between South Korea and the U.S., which recently mobilized stealth fighters and advanced radars following the detection of the North positioning its missile launchers on its east coast, would offset geopolitical risk.

The North’s unprecedented level of threats has further increased investors’ sensitivity to the regional tension, said Han Beom-ho, an analyst at Shinhan Investment.

China’s numerous calls to tame the North also had limited effect, with a grim outlook for a political compromise over the matter.

Han expects the benchmark KOSPI to remain steadfast above 1,900 points backed by stronger fundamentals of domestic companies compared to the early 2000s.

By Park Hyong-ki (hkp@heraldcorp.com)