By: Our Correspondent

Asia’s financial markets have largely shrugged off news of North Korea’s nuclear testing gambit. They just don’t appear to believe that the communist state’s latest machinations are the major threat to regional, let alone world, peace that screaming news headlines across the planet suggest.

In Japan, perhaps more nervous than even South Korea about Kim Jong-Il’s possession of a nuke, markets remained markedly steady, with the benchmark Nikkei average closing up slightly, by 0.25 percent. Even the South Korean market is down less than 2% after two days of post-bomb trading. Gold and oil jumped briefly but otherwise the event was just a blip on trading screens. Shares in other markets across Asia closed mostly higher, bouncing back from some severe bomb-driven losses yesterday, dealers said.

In some cases, market analysts were almost blithe. Economist Sharmila Whelan of CLSA Asia Pacific Markets in Hong Kong, wrote in a short analysis Tuesday morning that she is more concerned with South Korea’s macroeconomics, with business data declining for a second month. In Tokyo, companies supplying equipment to Japan’s Self-Defence Force climbed on the promise of more contracts.
This kind of reaction suggests that so far Kim Jong Il has been correct in his gamble that he can raise the stakes without setting off a reaction that would de-stabilise the peninsula, the region or the world. The fact is that many assumed Pyongyang already had the capability to make a bomb, but viewed it as part bargaining chip and part last-ditch defense in the event that anybody tries to achieve regime change by force.

North Korea’s claim to have tested a weapon raises the possibility of five different scenarios for Malcolm Wood of Morgan Stanley – regime collapse, direct control by China over North Korea, a regional arms race, resumption of the stalled six-party talks or a return to the status quo.

For Wood, “Talks and aid have demonstrably failed to date, while US military protection makes an arms race seem unnecessary. More importantly, a return to the status quo would imply another failure of commitment by the global community to successfully resolve the nuclear weapons ambition of a so-called ‘rogue state.’ On the other hand, regime collapse could prove an expensive outcome, especially for South Korea; hence we view increased Chinese involvement in North Korea as the most likely outcome. Were this to lead to a more moderate, outward-looking government in North Korea, it could be a positive development for regional markets, and for South Korea in particular.”

Of course, Kim could still be proved wrong. The additional sanctions that will now be forthcoming under UN auspices may create such hardship that the regime would implode. However, given how much it has already suffered the populace is unlikely to rebel now. A split in the ranks of the ruling elite is more likely, but even that is unlikely to coalesce around the nuclear issue, a matter of pride for most North Koreans, and some in the south too.

The international anger is more from frustration than anything else. Military action is ruled out both by China and the fact that the US has too many battles on its hands right now. And as far as nuclear issues are concerned, Washington is far more focused on Iran. China not only remembers the Korean War, in which it sent a million soldiers across the Yalu River,  but also has a mutual defense pact with Pyongyang dating to 1961. It may want out of that but escape isn’t easy.
As much as anything, top US government officials are angry because Kim, as he has repeatedly done in the past, has demonstrated the utter futility of American refusal to deal directly with a country identified as a member of President George Bush’s Axis of Evil in 2002. Engagement could probably have headed off the bomb. As Gideon Rachman pointed out in an astute column in the 10 October Financial Times, the only member of the Axis of Evil (North Korea, Iran and Iraq) that the US ended up attacking was Iraq, which is the one without a nuclear weapon.

South Korea resents the failure of its sunshine diplomacy, Japan the fact that newly announced Prime Minister Shinzo Abe only last week, before he went to China, made a big issue of seeking to stop the Korean bomb. China is upset because it has been ignored by the ultranationalist Koreans and frustrated that it is stuck giving some economic support to the regime in fear of either chaos or losing all influence if it doesn’t.
The bottom line for markets is that proliferation in broad terms is unstoppable and only really dangerous if another power is absolutely set on stopping it, as in the case of Iran but not North Korea.

Given the US nuclear umbrella in the region Kim has created facts which are militarily insignificant. But they are likely to be politically effective, or at least to result in a continuation of the status quo and a regional standoff. The development of nuclear weapons by North Korea has been the foundation for a supposed crisis for the past dozen or more years as major powers have tried to figure out what to do about Kim’s adventures.

Markets apparently are assuming that after much noise and breast-beating, there will be an attempt to stop Kim expanding his arsenal or selling his bomb technology. In which case, talks are inevitable. And even if Kim's regime is somehow overthrown, any successor government is bound to use the nuke as a bargaining chip, something Kim has taught his starveling country to do for years.
In reality NK is a small, weak state surrounded by powers that have not been able to control what he does at home but are more than capable of keeping North Korea from being a real menace to anything other than non-proliferation, which is anyway already largely a dead letter thanks to nuclear weapons in the hands of Israel, India and Pakistan.

Markets can be badly wrong, of course, particularly if, as now, they continue to be buoyed by an onrush of international liquidity that allows dodgy Chinese banks to launch record-breaking initial public offerings, as ICBC did Monday. But investors might do better worrying about ICBC than about Kim Jong Il's latest and very successful effort to hit the headlines and frustrate President George W. Bush.