North Korea's ICBM: what does it all mean? - Nomura

Analysts at Nomura noted that on 4 July, Independence Day in the US and ahead of G20 summit in Germany on 7-8 July, North Korea has announced that it has successfully tested an intercontinental ballistic missile (ICBM).

Key Quotes:

"Pyongyang tested a long-range missile this morning, but claims that it was an ICBM are as yet unconfirmed. This is the first missile test since the USSouth Korean summit on 29-30 June, when President Trump met with his South Korean counterpart Moon Jae-in to discuss, among other matters, the North Korean threat. Reports indicate that the projectile may have landed within Japan’s Exclusive Economic Zone. There have been at least 12 missile tests and other provocations by North Korea this year; most recently, on 23 June, the North tested a rocket engine as part of its purported ballistic missile programme.

Resolving the North Korea issues is such a complicated task because the end goals of those with a vested interest (including the US, China, South Korea and Japan) are all rather different. As a result, broad sanctions are the only compromise in trying to mitigate the North Korean threat, in our view. Economic sanctions have proved ineffective in limiting Pyongyang’s nuclear ambitions, as the North continues despite having already experienced extreme hardship and human suffering in the 1990s.

The US and Japan have agreed to urge China to take a firmer line with Pyongyang, and China has made it clear on several occasions that it would like to see a diplomatic solution. President Moon favours a diplomatic re-engagement with Pyongyang and said after the Korea-US summit last week that "Dialogue is possible if North Korea stops [its] provocations“. President Moon has proposed that the two Koreas form a unified team to compete in the 2018 Winter Olympics to be held in the city of Pyeongchang in South Korea. However, much depends on the North’s actions: if it holds more nuclear or missile tests it could divide the foreign stance towards it, with the US pressing for firmer action, in our opinion.

President Moon has promised to re-evaluate the deployment of the THAAD missile system as the number of Chinese visitors to South Korea plunged by over 60% y-o-y in April-May (exceeding our expected 40% fall) – restricted by official policy since its original deployment earlier in the year. That said, withdrawing THAAD could prove hard given it has been almost fully deployed and the fact that Pyongyang’s nuclear threat remains. The death of Otto Warmbier, a 21-year-old US student who was detained in North Korea and died six days after being flown home to Ohio, seems to have fuelled growing calls in the US for tougher measures against North Korea, including travel ban to the country. Indeed, after Presidents Moon and Trump met, they agreed to closely cooperate to maintain national security based on firm US-South Korea relations.

Tensions in the region have been exacerbated by the nearly month-long joint naval drills between the US Navy's Carl Vinson and USS Ronald Reagan aircraft carriers and South Korean ships from 29 April. The USS Carl Vinson and the USS Ronald Reagan have now left the East Sea following joint exercises on 1-3 June with the Japan Self-Defence Force. A third aircraft carrier, the USS Nimitz, has reportedly been deployed in the western Pacific.

Further naval drills by the US, South Korea and Japan and the future deployment of aircraft carriers, remain a possibility and could be seen as a show of force to deter any serious action by North Korea, rather than as an indication of any imminent hostilities.

Nonetheless, there remains the possibility of North Korea testing ballistic missiles or exchanging fire near the Northern Limit Line – the disputed maritime border in the Yellow Sea. We will closely monitor whether today's claims by Pyongyang will draw a US military response, which would add sizable downside risks to our South Korea (and Asia) economic outlook."