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Goldman, BofAML see limited disruption from Japan-Korea spat

[HONG KONG] There's little chance of tensions between Japan and South Korea developing into a full-fledged trade war, with any disruptions from Japan's tighter export regulations likely to be short-lived, according to economists at Goldman Sachs Group and Bank of America Merrill Lynch (BofAML).

Japan introduced stricter screening of exports of specialised materials vital for Korea's tech sector earlier this month and has proposed removing its neighbour from a "white list" of trusted export markets, as a dispute stemming from colonial-era compensation spilled into the economy.

While the tussle has raised concerns of a potential upending of the global supply chain that companies from both countries are deeply involved in, the economists doubt the outcome will be so extreme.

The "saber-rattling" from Japan and Korea could get worse in the next few months since both countries' leaders have little incentive to compromise, but Japan is unlikely to roll out additional punitive measures, BofAML economists including Izumi Devalier wrote on July 19.

Trade should return to "business-as-usual" after two to three months once Japanese suppliers get used to the new licensing requirements and the process becomes "fairly formulaic," according to BofAML.

Goldman Sachs sees the removal of Korea from the white list as unlikely to lead to large, sustained disruptions in bilateral trade activities, due to the countries' mutual dependence, economists including Irene Choi wrote in a July 21 report.

"In our baseline scenario of short-lived supply disruption from a possible de-listing, we do not see large downside risks to our 2019 real GDP growth forecast of 2.1 per cent, although there could be large volatility surrounding Q3-Q4 growth," Goldman economists wrote.

For the Korean side, rather than embarking on retaliatory measures, the government is more likely to continue a push to diversify sources of imports and the development of domestic substitutes, according to Goldman.