N. Korea Signals Kim Succession as South Braces

By Sangwon Yoon, Eunkyung Seo and Taejin Park - Dec 19, 2011 4:39 PM GMT+0700

North Korea said its people and military back Kim Jong Un, the little-known third son of Kim Jong Il, as leader as uncertainty around the political succession on a peninsula where 1.7 million troops are stationed unsettled stock markets from Seoul to Hong Kong.

Kim Jong Il died Dec. 17 from a heart attack brought on by mental and physical strain, the official Korean Central News Agency said today, bringing an end to a 17-year tenure in which North Korea built nuclear weapons while some 2 million of its people died from famine. State media urged citizens to “loyally follow” Jong Un, who is at the “forefront of the revolution.”

“Kim’s death happened at a very bad time for the North Korean regime,” said Brian Myers, a professor of international studies at Dongseo University in Busan, South Korea. “It has really not proceeded very quickly with the glorification of the heir-apparent, Kim Jong Un. An average North Korean is still in the dark about his upbringing, his biography, why he is uniquely well qualified to take over the country.”

South Korea pledged steps by the central bank if needed to stabilize financial markets, and called in police officers for emergency duty while keeping the alert level for the military unchanged. The transition in the north adds to risks for Asia’s fourth-largest economy, which is already contending with slowing export growth as Europe’s debt crisis dents global demand.

Stocks Drop

The Kospi index of shares closed down 3.4 percent in Seoul (KOSPI), and the MSCI Asia Pacific Index lost 1.8 percent as of 6 p.m. Korea time. South Korea’s won sank 1.4 percent to 1,174.80 per dollar.

During a state television broadcast monitored in Tokyo, the announcer wept as she read the news of Kim Jong Il’s death. Footage was aired of thousands of people in the main square of the capital of Pyongyang chanting in unison and waving Kimjongilia, a flower named after the deceased leader. While official reports give Kim’s age as 69, Russian records indicate he was born in Siberia in February 1941.

The late leader last year set in line his succession plan. Kim Jong Un, thought to be 28 or 29, was first mentioned in official KCNA dispatches on Sept. 28, 2010, when his appointments as general and vice chairman of the Central Military Commission of the party were announced.

Right Side

Jong Un stood at his father’s right side at a military parade the next month, wearing a black suit with a mandarin collar similar to the style worn by his grandfather, who founded the nation after World War II. The younger Kim, educated in Switzerland, also emulates Kim Il Sung’s slicked-back hairstyle, rather than the bouffant favored by his father.

Jong Il was known in official media as “dear leader,” with Il Sung known as “great leader.” KCNA today said that Jong Un is a “great successor” to lead the juche project, referring to the North’s state ideology of self reliance.

“It comes at a time when there was a slight indication North Korea was going through one of its good-boy phases,” said Carlyle Thayer, a politics professor at the Australian Defense Force Academy in Canberra, referring to signs of a North Korean pledge to suspend parts of its nuclear program. “I don’t expect an outbreak of war, but it takes the positive trends that were beginning to emerge and perhaps puts them on hold.”

North Korea for years has engaged in a strategy of brinkmanship with the U.S. and South Korea following the 1950-53 Korean war, which ended without a peace treaty. America became one of the nation’s biggest aid donors as its negotiators forged periodic agreements with the North to suspend its nuclear armaments program.

Food Aid

The U.S. agreed on providing food aid to North Korea in recent talks held between the countries in Beijing, based on steps including a suspension of the North’s uranium enrichment, South Korea’s Yonhap News reported two days ago, citing diplomatic officials in Seoul it didn’t identify.

The Obama administration resumed direct talks with Kim Jong Il’s regime in October after increased sanctions had no effect in persuading it to abandon the nuclear program. The U.S. envoy on North Korea Glyn Davies told reporters in Tokyo last week further bilateral talks hinge on the totalitarian state changing its “provocative” behavior.

The U.S. is “closely monitoring” reports that North Korean leader Kim Jong Il has died, the White House said in a statement in Washington. President Barack Obama has been notified and the administration is in “close touch” with allies South Korea and Japan, the statement said, citing the office of the press secretary. The U.S. remains “committed to stability on the Korean peninsula,” the statement said.

Military Monitoring

All police officers in South Korea were called to work for emergency duty and commanders are discussing “a detailed course of action” in response to developments in the North, the National Police Agency said in a statement on its website today. The South’s military has no immediate plans to change monitoring and combat-alert levels after finding no unusual movements among North Korean forces, said a spokesman for the joint chiefs of staff who declined to be named in keeping with military policy.

Jung Seung Jo, the chairman of South Korea’s joint chiefs of staff, and James Thurman, commander of U.S. forces in Korea, agreed to respond calmly by strengthening military preparedness, and not creating “unnecessary tension,” the official said.

Market Watch

South Korea’s central bank will “closely monitor” any developments and will take steps to stabilize markets and seek international cooperation if needed, Bank of Korea Governor Kim Choong Soo said at a meeting in Seoul today. The BOK said in a statement it will run a 24-hour market monitoring system.

Thomas Byrne, a senior vice president at Moody’s Investors Service in Singapore, said in an interview that “we recognize that the collapse of the North Korean state or an outbreak of war pose an event risk for South Korea, which will have severe implications.” He added “we consider that likelihood to be remote even under the current uncertain situation.”

Yang Moo Jin, a professor at University of North Korean Studies in Seoul, echoed Byrne’s assessment.

“The possibility of a public uprising or military coup in North Korea seems low since the North has prepared for the succession for the past year,” said Yang. “Kim Jong Un’s complete takeover of the helm will not take place for awhile due to his young age and inexperienced leadership. The North will be under the control of a governing body, I expect, for about a year.”

Deadly Attacks

Tensions on the peninsula have risen since attacks last year that killed 50 South Koreans. North Korea shelled a South Korean island last November, killing four people. It has denied an international report blaming Kim’s regime for the torpedoing of a South Korean warship in March 2010 that killed 46 sailors.

North Korea last month said it was making progress in building a light-water atomic reactors and producing low- enriched uranium. The U.S., Japan and South Korea have all urged China, North Korea’s biggest ally, to persuade it to return to six-nation nuclear disarmament talks that were abandoned in April 2009.

“Kim’s death was one of the critical Black Swan risks on the Korean peninsula,” said Kwon Young Sun, a Hong Kong-based economist at Nomura Holdings Inc. “The initial shock will be negative for South Korean markets. What’s important is the policy makers’ responses. The South Korean government probably has contingency plan and international cooperation with the U.S. and China is also very important.”

Defense Shares

Speco Co. led gains among defense-related companies in Seoul stock trading. A defense equipment manufacturer, it jumped by the daily limit 15 percent to 2,350 won. Victek Co., an electronic warfare equipment maker, and Huneed Technologies, a military communication equipment manufacturer, also rallied 15 percent.

The inexperience and youth of North Korea’s heir-apparent Kim Jong Un “increase the likelihood of miscalculation” with South Korea and the U.S. and raises the potential risk of “provocations,” General Thurman said in written answers to the Senate Armed Services Committee in June. “Our primary concern is the potential for additional North Korean provocations, which is a tool of choice as part of its coercive diplomacy.”

To contact the reporter on this story: Stuart Biggs in Tokyo at sbiggs3@bloomberg.net

To contact the editor responsible for this story: John Brinsley at jbrinsley@bloomberg.net