TT-593 -- Economics of Not Having a Korean War, e-biz news from Japan

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A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, December 05, 2010, Issue No. 593


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On November 24th, the Nikkei dropped 170 points when the
markets opened, mostly because of the shocking news that
North Korea had just bombarded South Korea's Yeonpyeong
Island. The island, home to 1,700 civilians and a South
Korean military base, was caught completely by surprise.
Four people were killed, 18 injured, and once again the
region was reminded just how irrational and dangerous the
North Korean state can be.

The Nikkei quickly recovered later in the day, and South
Korea to its credit chose not to retaliate other than
lobbing a few shells of its own at the North Korean coast
line, where the North Korea batteries are. The then-Defense
Minister, Kim Tae-young, defended his nation's low-level
of response by saying that the government feared overt
retaliation might start an all-out war. Actually it also
came out later that many of the South Korean shells fired
in return in any case landed in the sea due the fact that
the artillery team on the island needs training.

The subsequent political fall-out of the weak response to
the North's second major attack in just a few months (the
first being the sinking of the 1,200-ton corvette, the
Cheonan not far from Yeonpyeong Island) has polarized the
South Korean parliament and has led to the rise of the
hawks. Most notable is the new Defense Minister, Kim
Kwan-jin, who announced today that if North Korea attacks
again, something that the South Korean intelligence agency
expects, then South Korea will use fighter jets to strike

And not long after that we might expect a war to start
right on Japan's doorstep.

Analysts say that Seoul would come off very badly in the
event of a war, since the capital is easily within the
reach of almost 10,000 artillery pieces and tanks in the
North, many of which are hidden in caves or well-built
bunkers. Supplementing the artillery and armor are at
least 5,200 240mm multiple rocket launchers which have a
range of 60km and which can fire up to 1 rocket a minute
each. Then of course there are the rogue nation's low-grade
but nonetheless fearful nukes.

[Continued below...]

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What this incident has done is to reinforce to South Korea
and Japan just who their friends are, and just how much
they need each other and the USA. Starting with the USA,
both South Korea and Japan have recently embarked on
separate military exercises designed to send a message to
both North Korea and China that the recent events cannot be
allowed to continue.

For the first time we can remember, we received a press
release from the US military, announcing the commencement
of the "Keen Sword 2010" military exercise on Friday
December 3rd. Keen Sword brings together 34,000 Japanese
troops and 10,000 US troops, 430 aircraft, 60 ships, and
other air, land, and sea operations. Significantly, a
number of South Korean officers have been invited to
participate as observers, the first such time this has

North Korea should not underestimate the likelihood of
South Korea and Japan creating closer military ties.

We started this commentary by observing the impact of the
bombardment on the Nikkei Index -- there was almost none.
Wars in one's own backyard are fearful, but obviously so
far investors don't believe that North Korea is crazy
enough to go all the way. Some analysts in Seoul say that
the North shouldn't be viewed as rational, since its
citizens are reared to only respect absolute power --
even above the value of human life itself. So if a war
meant that many in the country would have to be
sacrificed, then much the same as islamists on a jihad,
the leadership and even the people themselves may see the
sacrifice as being acceptable.

Other analysts, however, insist that North Korea has only
focused on lightweight targets and is intentionally
ratcheting up the tension without going all the way. This
isn't an unreasonable assessment, and would repeat a
pattern established over previous years, when the North
successfully pushed foreign nations to supply it with fuel,
food, and other necessities in order to back down from
nuclear development. Of course they were proven to be
total liars, and now have more nuclear capability than

The best scenario would be if the North backed off, perhaps
in return for some aid, and that over the next few years,
it started to come apart politically. This is quite
possible as Kim Jong-Il hands over the reins to his rather
inexperienced son Kim Jong-Un. According to analysts, the
very fact that Jong-Il seems to need these minor military
"victories" for his son speaks to the fact that the younger
Kim's anointment is not without its critics.

Wikileaks has helped introduce a new dynamic into the
discussion, when it was revealed that younger Chinese
leaders had told the US that they would not be opposed to
a reunification of the two Koreas, under leadership of the
South. This would remove a big headache for China, as they
continually have to defend the rogue state, but on the
other hand, it would also remove a convenient thorn with
which to needle Japan -- which is probably why they haven't
encouraged removal of the Kim regime up until now.

If there was a reunification, and hopefully a peaceful one,
then that would spell a huge business opportunity to bring
the North up to modern levels in terms of infrastructure,
education, finance, and pretty much everything else. There
is an interesting analysis by Bloomberg's William Pesek, on
what reunification might actually cost.

You can get it here:

In a nutshell, Pesek quotes a think tank in Washington that
reckons reunification would cost between US$2trn and
US$5trn over a period of 30 years. In South Korea the
estimate is a lot lower, at around US$322bn-US$2.1trn, but
as Pesek points out, the German reunification cost US$2trn
and is still counting -- and it was extremely well managed
between two desirous partners. Yes, East Germany was in
bad shape, but still infinitely better than North Korea is
today. Also, the East Germans may have been repressed and
socialist but they weren't crazy. In North Korea's case there
will be a much greater need to deprogram its citizens and
show them how a modern, free society should work.

If reunifying the North and South did cost US$5trn, this
is much more than South Korea with its US$833bn economy
could handle alone. Indeed, it would require the mother of
all bail-outs from other nations of the world. Pesek
points out that the number is twice China's entire foreign
currency reserves, six times more than Obama's US$787bn
fiscal stimulus last year, and 45 times what the EU is
spending to bail-out Ireland at the moment.

In other words, finding that kind of money might be very
difficult. Indeed, it might be sufficiently huge that it
provides incentive for the world to NOT seek reunification,
but instead leave North Korea in its deep, dark hole,
contained by a combination of military threats and
appeasement. This would certainly be the cheapest way out
for South Korea, although not spiritually pleasing.

If threats and appeasement are the name of the game, then
you can start buying stocks in military hardware companies
selling to both South Korea and Japan, because both of
these countries are going to become a lot more hawkish
over the next few months.

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+++ NEWS

- Bird flu outbreak from wild bird infection?
- Government to start selling rental properties
- Only 9.2% of companies forecast improvement in 2011
- Zynga to put FarmVille game on Mixi
- Is USA headed for a lost decade like Japan?

-> Bird flu outbreak from wild bird infection?

We're going to have a lot more problems with N5N1 bird flu
if suspicions are correct that the latest outbreak of avian
influenza at a poultry farm in Yasugi, Shimane-ken, are
true. Apparently a "small, wild bird" was seen inside the
protective netting of the poultry farm prior to the virus
outbreak. Given that a wild duck in Hokkaido in October was
discovered to have the H5N1 virus in its droppings, this
means that any access to wild birds in the future could
decimate the Japanese poultry industry. ***Ed: Unless
authorities want to kill off all wild birds around poultry
farms, it seems obvious to us that the current factory
farming methods of raising poultry are rendering modern-day
birds much more susceptible to disease. Of course the
cat is out of the bag in terms of H5N1, so maybe poultry
will be one form of protein to disappear from the menu?**
(Source: TT commentary from, Dec 4,

-> Government to start selling rental properties

In a prelude of bigger things to come, the Land Ministry's
rental agency to the poor will start selling off properties
that are fetching high-end rents [Ed: which makes you
wonder why they have those properties in the first place.].
Apparently 26,000 properties out of the Urban Renaissance
Agency's (URA) 760,000 properties are rented out for
JPY150,000/month or more. Indeed, about 6,000 fetch more
than JPY200,000/month. The Land Ministry will start selling
off the properties next year. ***Ed: This would explain why
the URA is starting to get aggressive with higher-end
tenants not paying their rents on time. Also, given that
the URA's rents are far below market rates, there will be
more than a few upset tenants over the coming months...**
(Source: TT commentary from, Dec 5, 2010)

-> Only 9.2% of companies forecast improvement in 2011

While a trading company organization called the Japan
Foreign Trade Council predicts that Japan's trade surplus
will swell by 21% in FY2011 to JPY9.77trn, clearly the
export riches are limited to just a few companies. For a
more accurate picture of the pessimism pervading corporate
Japan, a Teikoku Databank survey has found that in fact
only 9.2% of companies think that they will do better in
2011. The survey of almost 23,000 companies found that
33.9% said business will worsen, and 34.5% said it will
stay flat. ***Ed: For most the cause was the high yen.**
(Source: TT commentary from, Dec 3, 2010)

-> Zynga to put FarmVille game on Mixi

Now here is something interesting... Zynga Game Network,
the big US online games operator that took over Unoh here
in Japan several months back, has said that it will
transplant its highly popular FarmVille game from Facebook
in the US, to Mixi here in Japan. This must be quite
irking for Facebook, which is still in stealth mode here
in Japan but will no doubt be ramping up its operations in
competition to Mixi next year. FarmVille has 50m users
abroad, so it will be interesting to see how it is received
here in Japan. Mixi has 14.5m subscribers. (Source: TT
commentary from, Dec 1, 2010)

-> Is USA headed for a lost decade like Japan?

We came across this very interesting report on financial
site, which provides a comparison of how
similar the financial meltdown and subsequent deflation in
Japan appears to be to the current US financial crisis. The
writer believes that the US is destined to have similar or
even worse deflation -- particularly for property and
stocks -- to that experienced in Japan since the early
1990's. He reckons that the bear market will probably last
for years. ***Ed: Time to rethink where you're investing
your money right now?** (Source: TT commentary from, Dec 4, 2010)

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.


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