Japan Politics July 2019

Japan

Japan: Japan-South Korea trade feud looks set to deteriorate, threatening Japanese tech firms and broader economy

July 22, 2019

Long-standing tensions between Japan and South Korea—originating from colonial-era disputes over forced labor—significantly escalated when Japan applied new restrictions on exports of key materials used in high-tech industries in Korea, effective 4 July. The new measures require Japanese exporters to obtain specific clearance to sell three chemicals critical to the manufacturing of semiconductors—particularly memory chips—and displays, industries in which Korea is among the world’s leading producers. If the dispute escalates or drags on for months, which currently looks rather likely, it could disrupt the global tech supply chain and deal a blow to firms in the Japanese tech industry. The feud could also spill over to the broader economy—anecdotal evidence already suggests some impact on unrelated sectors—by causing a breakdown of trust and economic ties. Over the long-run, this could herald a broader economic decoupling, with Korean firms greatly reducing their reliance on Japanese inputs.

For now, however, the feud’s economic impact appears modest, as Japanese officials reportedly declared that the government intends to eventually grant licenses for non-military exports after an evaluation period of approximately 90 days. The cost of the dispute, for Japanese and Korean firms alike, would then only be borne in the form of delays and a higher administrative burden. However, signs indicate that the trade spat could escalate in the near-term, with even more dire implications for Japanese tech firms.

A bilateral negotiation meeting on 12 July failed to ameliorate relations, and may have in fact have worsened them; on 17 July, Japan reportedly refused South Korea’s request to hold a second working meeting. Moreover, Tokyo has already signaled that, from August onwards, Korea could be removed from a “white list” of countries that receive fast-track access to Japanese exports, potentially broadening the dispute to other segments of the economy such as automobiles. Nevertheless, Prime Minister Abe might strike a more conciliatory tone in the coming weeks as political considerations subside after the 21 July upper house election.

Given that Korea is dependent on imports from Japan—the world’s largest producer of the three high-tech chemicals—and that semiconductor manufacturers typically hold low inventories of these materials, an escalation of tensions sizably limiting shipments to Korea would cause semiconductor production to sharply decline and prices to spike. Given that Korean chips are widely used in most tech products, this would have a significant impact on the Japanese and global tech industries.

As DBS economist Ma Tieying puts it, “while substitutes for the Korea-made semiconductors and displays are available from the US, Taiwan and even China, the substitution process may not be smooth in specific areas in the short term. The shortage/delay of component supply would hurt the downstream producers for smartphones, computers and TVs, such as […] Sony and Panasonic”. This would come on top of the blow dealt to Japanese chemical manufacturers, who count Korean firms as key clients.

Beyond the tech sector, the feud risks inflicting lasting damage to Japanese-Korean economic relations, making diplomatic cooperation harder and sowing resentment. It has reportedly already caused Korean tourists to cancel planned trips to Japan, as well as numbers of Korean stores to halt sales of Japanese products.

More importantly, the dispute could lead to a major shift over the longer-run, in which Korean companies would progressively eliminate their use of Japanese-made tech-sector inputs. This could include not only chemicals, but also machinery and other semiconductor manufacturing equipment, dealing a much more severe blow to the Japanese economy.


Author:, Economist

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