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Japan tech suppliers unnerved by export restriction on South Korea

Seoul plans to file complaint with WTO as dispute over wartime labor compensation heats up

Japan announced on July 1 that it will restrict exports of certain technology-related products to South Korea.

TOKYO -- Japanese companies say they were blindsided by the government's announcement that it will tighten controls on exports of semiconductor manufacturing materials to South Korea, a move seen as escalating a simmering dispute over wartime labor compensation.

Japan's ministry of economy, trade and industry said on Monday that domestic suppliers will have to apply for approval for each contract to sell to South Korean buyers. Suppliers say they were not informed of the decision ahead of time, and analysts are warning of potential disruption to supply chains.

"The decision can have a major impact on our business," said an official at Tokyo Ohka Kogyo, which derives about a fifth of its revenues from exports of resist, a material used for semiconductor production, to South Korea and Taiwan. The company said it was not consulted about the new policy and pointed to the risk of its exports not gaining government approval. "We were surprised that such a policy could be introduced so easily," the official said.

Mitsubishi Chemical Holdings, another supplier affected by the government's move, attempted to downplay the impact of the decision, saying that while it could slow shipments to South Korea, it was not designed to block them completely. "Japan just chaired a Group of 20 leaders' summit in Osaka, in which the importance of free trade was just reaffirmed," a Mitsubishi Chemical spokesman said. "We hope Japan will respect that spirit."

Mitsubishi Chemical Holdings supplies etching gas and resist, both of which are used in semiconductor production, through its subsidiaries. According to Akira Minamikawa, semiconductor analyst at IHS Markit, Japan accounts for about 80% of the global supply of resist and etching gas.

"Shipping semiconductor materials to South Korea will take more time and could potentially cause a temporary supply shortage in South Korea," Minamikawa said. "There are other suppliers, but it will be difficult to switch to other suppliers without compromising the product quality, especially in the production of high-end products, such as memory chips." 

Seoul responded strongly to Japan's export restriction. South Korea's foreign ministry summoned the Japanese ambassador to Seoul and demanded that Tokyo immediately retract its decision. South Korea plans to file a complaint with the World Trade Organization, Yonhap News Agency on Monday.

The move comes just three weeks before a triennial upper house election in Japan, in which Prime Minister Shinzo Abe's ruling coalition hopes to defend its strong majority. The Abe government had previously tried to keep things calm in the face of a growing list of bilateral issues with Seoul. But on Monday, it chose to escalate the standoff.

"Showing a strong stance toward South Korea could boost public support for the government," said Hidehiko Mukoyama, Korea analyst at Japan Research Institute in Tokyo. Mukoyama compared the move to Indian Prime Minister Narendra Modi going on the offensive against Pakistan earlier this year, a move that was widely seen as fanning patriotic fervor and helping him win the subsequent general election.

Signs of trouble were in sight in the run-up to the G-20 summit in Osaka last week, where Abe and South Korean President Moon Jae-in greeted each other with awkward handshakes.

Bilateral relations have come under strain in the past couple of years, with liberal-leaning Moon frequently clashing with conservative Abe on a range of issues. The Moon government has backed out of a 2015 agreement to settle the issue of wartime "comfort women" once and for all. South Korea's Supreme Court has ruled that Japanese companies should pay reparations to South Koreans who were forced to work in Japan before and during World War II, a decision that ran counter to the 1965 bilateral treaty stating that all such claims have been settled.

Just before the G-20 summit, South Korea proposed that companies of the two countries chip in funds to compensate the victims. Japan quickly rejected the idea, on the grounds that this, too, would go against the 1965 agreement.

The ongoing dispute so far has had little direct impact on bilateral economic relations. In 2018, the two countries were each other's second most popular tourism destinations.

But that could change if Japan's decision is met with a strong reaction from South Korean.

"The Japanese government may make short-term gains from the latest decision, but could cause long-term damage to bilateral relations," Japan Research Institute's Mukoyama said.

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