N-E Asia tensions: markets wise to show nervousness

FINANCIAL markets are supposed to be smart at pricing in risk, so how come they have been sleepwalking towards disaster in North-east Asia for so long? It took US President Donald Trump's rant about "fire and fury" and a hot-headed threat by North Korean leader Kim Jong-un of a strike on Guam to wake them up. Obsessed as they are with Mr Trump's increasingly dangerous antics, the Brexit mess, the Macron phenomenon in France, upcoming elections in Germany and other Western world diversions, markets had apparently not noticed the inexorable drift or march towards a nuclear catastrophe in North-east Asia.

Finally, the penny showed signs of dropping last week when global investors began shifting money out of the dollar (which slid to a two-month low) and into gold and currencies such as the Swiss franc. Stocks also began to feel the pain. But this half-hearted hedging does not begin to acknowledge the size and awfulness of impending risks. As history has often shown, wars happen precisely because no one believes they could happen. The usual complacent view is that "it couldn't happen here", and with regard to East Asia this is linked to a belief that the people of the region are too "pragmatic" to sacrifice their prosperity.

The "East Asian Miracle" that saw Japan rise dramatically from the ashes of World War II, the "takeoff" of neighbouring countries and the astonishing rise of China to become the world's second-largest economy dazzled markets to the point where they could not see what was going on. Yet tensions have been growing for years as China emerged as a competitor not only to Japan but also to the United States as an economic and diplomatic power in and beyond Asia. The military frictions this created were ignored by markets despite the potential for crisis and accident.