Kospi Drops Most in 5 Months on North Korea Threats

South Korea’s benchmark stock index had the biggest weekly decline since May and the won slid to a seven-month low as the risk of conflict with North Korea spurred capital outflows.

The Kospi index of shares tumbled today by the most since October as global funds sold more stocks than they bought, as they have on all but two days in the past three weeks. North Korea said yesterday it passed a law authorizing “counter-actions” against U.S. aggression including a nuclear strike, having announced on March 30 that a “state of war” exists with the South. The yen sank to its weakest level since August 2009, helping Japanese exporters compete with Korean rivals, after monetary easing by the Bank of Japan stepped.

“Geopolitical risks have been significantly magnified this week, triggering sell-offs of South Korean assets as investors were unsure how the situation would develop under the new leader of the communist state,” said Han Sang Soo, a money manager at Samsung Asset Management Co., which oversees about $114 billion. “Some investors also thought Japanese names may be a good place to invest given the country’s currency policies.”

The Kospi index closed 1.6 percent lower in Seoul, contributing to a 3.9 percent loss for the week. The won slide

0.7 percent today and 1.8 percent from a week ago to 1,131.69 per dollar, according to data compiled by Bloomberg. The currency touched 1,131.73, the weakest level since Sept. 6.

Volatility Surges

One-month implied volatility in the won, a measure of expected moves in the exchange rate used to price options, rose 47 basis points, or 0.47 percentage point, to 9.23 percent. It surged 179 basis points this week. Government bonds gained today, with the yield on the 2.75 percent notes due March 2018 dropping two basis points from yesterday to 2.54 percent, according to prices from Korea Exchange Inc. The five-year yield reached 2.51 percent last week, the lowest it has been in Bloomberg data going back to 2000.

“Geopolitical risk from the North Korean threat is likely to weigh on the South Korean won for an extended period of time,” said Suh Dae Il, an analyst at KDB Daewoo Securities Co. in Seoul. “Investors will also eye the yen movement while exporters’ dollar sales may limit won declines.”

South Korea will deploy a 24-hour monitoring system of financial markets and prepare “strong and swift” responses to stabilize prices if needed as tensions with the North escalate, Vice Finance Minister Choo Kyung Ho said at an emergency meeting with counterparts from the Bank of Korea and financial regulators today. The impact of the North’s threats so far has been limited, Choo said.

Foreign Funds

The Kospi 200 Volatility Index, a measure of the cost to protect against equity losses, has surged 29 percent this week. Foreign funds have unloaded a net 1.38 trillion won ($1.2 billion) of Kospi index shares this week, Korea Exchange Inc. data show.

Hyundai Motor Co. and Kia Motors Corp., the biggest South Korean automakers, retreated at least 4.4 percent today, extending yesterday’s slide that was triggered by plans to recall vehicles in the U.S. for electronic defects. The shares also fell today as the yen slumped. A weaker yen boosts the competitiveness of Japanese automakers that compete with Korean companies in key markets.

The yen slid against all its 16 most-traded peers this week after BOJ Governor Haruhiko Kuroda yesterday exceeded analysts’ estimates in announcing stimulus measures that aim to spur annual inflation to 2 percent in two years. The central bank said it will buy 7 trillion yen ($72 billion) of bonds a month to help achieve its goal.

A rapid weakening of the yen is expected to hurt the price competitiveness of South Korean exports, Bank of Korea said in a biannual report yesterday. The won strengthened 20 percent against the yen in the past six months.