Japan removes South Korea from favoured export 'white list'

[TOKYO] Japan decided to remove South Korea from a list of trusted export destinations amid escalating tensions between the two US allies that threaten to damage security ties and global supply lines.

Japanese Prime Minister Shinzo Abe's cabinet Friday struck its neighbor from a so-called "white list" of countries that benefit from less stringent checks and said the removal will take effect Aug 28. South Korea had urged Japan not to go ahead with the change, saying it would have grave consequences and prompt a rethink of security cooperation.

Trade Minister Hiroshige Seko told reporters on Friday that Japan didn't intend the move to affect relations with South Korea and Tokyo has thoroughly explained to the US and other relevant countries its revised rules for handling exports to South Korea. South Korean presidential spokeswoman Ko Min-jung called Japan's decision "deeply regrettable" and said the government would take a stern stance on what it saw as unfair moves.

Japanese officials have argued that the changes wouldn't have much long-term effect on legitimate exports. But the matter has been seen by Seoul as having major implications for its already struggling economy. President Moon Jae-in called for an emergency cabinet meeting shortly after the decision was announced and Bank of Korea Governor Lee Ju-yeol plans a meeting at 2 p.m. local time to discuss the impact of Japan's decision.

Economists at Goldman Sachs Group and Bank of America Merrill Lynch have also argued any disruptions from Japan's tighter export regulations are likely to be short-lived.

The move is expected to affect about 900 or more products including building materials, chemicals andtechnology components. Most of the top 20 items needed for South Korea's technology industry are highly dependent on Japanese suppliers, such as scrap steel, medical equipment, plastics and some chemical products, according to SK Securities.

TRADE DEPENDENT

South Korea's two tech giants, Samsung Electronics Co and SK Hynix Inc, are already struggling with the earlier export restrictions. Shares of Samsung fell as much as 2 per cent in Seoul on Friday, while Hynix dropped as much as 3 per cent.

"For a country like South Korea highly dependent on trade, this clouds the country's outlook structurally," said An Young-jin, an economist at SK Securities.

The decision came as US Secretary of State Mike Pompeo is set to meet with his counterparts from the two countries - Japan's Taro Kono and South Korea's Kang Kyung-wha - on the sidelines of a regional forum in Bangkok later Friday. A senior US official in Washington said this week the Trump administration was urging the two sides to reach a "standstill agreement" to give themselves room to negotiate.

Five of America's largest tech industry groups have written a joint letter to the trade ministers of Japan andSouth Korea to cool tensions they said threaten global production, saying too much was at stake. But Tokyo has said its neighbor is lax on management of sensitive materials and that its move is a matter of national security. Seoul denies the claim of improper controls.

GROWING TENSION

Long-fraught ties between Japan and South Korea have turned increasingly sour in recent months, potentially hampering their ability to work together to counter threats from North Korea and China. Much of the ill will relates to whether Japan has shown sufficient contrition for its 1910-45 occupation of the Korean Peninsula.

Japan was incensed by South Korean court rulings holding Japanese companies liable for cases of forced labor during the colonial period. The Japanese government says all such claims were settled under a 1965 treaty, while South Korean courts have said the agreement did not cover the emotional pain and distress suffered by the victims.

In what was seen by South Korea as retaliation, Japan announced stricter checks in July on exports of three specialty materials crucial to its neighbor's tech industry.

The effect on the broader relationship could be serious. South Korea is reported to be considering whether to end a military information-sharing agreement, even as North Korea fires off a series of missiles. The deadline for notifying Japan of such a decision comes Aug. 24.

Opinion polling shows that Abe and Moon have each won support at home for taking a tough stand on the matter. Even so, Japan could arguably end up hurting its own economy, where many sectors are closely meshed with South Korea's.

BLOOMBERG