Feud worsens as South Korea withdraws from intelligence-sharing deal with Japan

Tokyo/Seoul — The escalating feud between South Korea and Japan is heightening concerns about the fallout for global supply chains, financial markets and economic growth.

What started as a dispute over colonial-era grievances has snowballed over the past two months, with relations deteriorating to the lowest point in decades on Thursday after South Korea withdrew from a key intelligence-sharing pact. The won weakened on the news, while Japanese defence stocks rose.

“This seems to be a signal that the Korea-Japan conflict will continue,” said Joonwon Yoon, a fund manager at HDC Asset Management in Seoul. “It only adds more uncertainties to the market.”

Here’s how the spat is affecting businesses, investors and the outlook for growth in two of Asia’s biggest economies:

Companies

The global tech industry is watching the dispute closely after Japan restricted exports of materials vital to South Korean manufacturers of semiconductors and computer displays — a move that could upset supply chains for everything from Apple iPhones to Dell laptops. Samsung Electronics, the world’s biggest chipmaker, is trying to diversify its suppliers, but investors are wary: the stock has slumped about 6% since the start of July.

For Japanese companies, boycotts by South Korean consumers pose a growing threat. Sales of Japanese cars in South Korea plunged 32% in July from the prior month; beer sales from brands like Asahi Group reportedly declined 40%; and Fast Retailing said its Uniqlo stores in South Korea are taking a hit. The number of South Koreans visiting Japan slumped 7.6% in July, an ominous sign for travel agencies and duty-free store operators.

Beneficiaries of the spat include South Korea’s Soulbrain, which makes one of the materials affected by Japan’s export restrictions. Shares have surged more than 50% since early July on expectations the company will win more orders from Samsung and SK Hynix, another big Korean chipmaker. Shares of Japanese defence companies including Ishikawa Seisakusho and Hosoya Pyro-Engineering surged more than 10% in intraday trading on Friday.

Markets

The spat adds to a long list of headwinds facing South Korea’s stock market, from the US-China trade war to simmering concerns about global economic growth. The nation’s benchmark Kospi index has dropped about 8% since tensions began escalating in early July, one of the biggest declines worldwide, and the won has weakened about 4% against the dollar.

Japanese markets have held up somewhat better, with the Topix losing about 5%. The yen, seen as a haven currency during times of global market turbulence, has gained about 2% versus the greenback.

Some investors see opportunities in the volatility. NH-Amundi Asset Management, which manages about 40-trillion won ($33bn), has launched a Korean equity fund that invests in local suppliers that may benefit from Japan’s export restrictions.

Economy

The effect on growth has been limited so far, but the potential for disruption is significant. Japan and South Korea are each other’s third-biggest trading partners, according to data compiled by Bloomberg.

The spat won’t have an immediate effect on the countries’ sovereign credit ratings, but over time it could weaken their economic growth potential and that of the world by undermining support for multilateral trading frameworks, S&P Global Ratings said earlier in August. The Bank of Korea cut interest rates in July and has said it will consider responding with more monetary stimulus to ease the effects of trade tension. Forecasters surveyed by Bloomberg expect the nation’s economic growth to slow to just 2% in 2019, the weakest pace since the global financial crisis in 2009.

Even that may prove optimistic. Given that the stern stance from both sides has fuelled public support for President Moon Jae-in in South Korea and Prime Minister Abe Shinzo in Japan, the conflict is unlikely to end anytime soon.

Bloomberg