Photographer: Chung Sung-Jun/Getty Images

South Korea Raises Alert Over Economic Impact After Nuclear Test

South Korea’s government said the impact of North Korea’s sixth nuclear test could spread from financial markets to the real economy.

Existing uncertainty over trade policy and normalization of monetary policy in major economies could worsen the impact of North Korea’s actions, Finance Minister Kim Dong-yeon said in a meeting with officials from the government, central bank and financial regulator. The impact on financial markets is unlikely to be limited to the short term, he said.

"The government will monitor markets, exports, commodities, and foreign investment around the clock and act accordingly based on a contingency plan,” Kim said.

The recent spate of missile tests by North Korea had already raised concern among some South Korean economists as a risk to business and consumer sentiment.

Read more: Internal and external risks to the economy.

North Korea conducted its latest nuclear test on Sunday, defying international pressure and raising the risk of a military conflict. While past actions by North Korea have resulted only in increased market volatility, the central bank and some economists see the recent actions, including the missile tests, as raising the risk to the real economy.

One of the most important policy responses would be aimed at preventing a downgrade to South Korea’s sovereign credit rating due to the geopolitical risks, Kwon Young-sun, an economist for Nomura International Ltd., wrote in a report. The South Korean government will explain its contingency plan to major ratings agencies, and if situation worsens, could work toward restarting its currency-swap agreement with the Federal Reserve, Kwon wrote.

The won weakened 0.6 percent against the dollar on Monday to 1,129.80 per dollar as of 9:18 a.m. in Seoul. The Kospi stock index fell 1 percent.

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