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International relations

70 Japanese companies at risk of litigation after wartime ruling

Revived specter of historical labor issues leaves corporate Japan on edge

Lee Choon-shik, a victim who was forced to work for a Japanese company during World War II, sits inside the Supreme Court in Seoul on Oct. 30, 2018.   © Reuters

TOKYO/SEOUL -- Tuesday's ruling by South Korea's Supreme Court on a contentious wartime labor case involving Nippon Steel & Sumitomo Metal looks certain to extend beyond the Japanese steelmaker, immediately putting roughly 70 Japanese companies in South Korea at risk of losing similar court cases.

Japanese businesses have interests in many aspects of the Korean economy, including semiconductors, retail and tourism, and the ruling is likely to have a far-reaching impact on their operations. More broadly, the ruling risks shaking the foundations of the close diplomatic and economic relationship the countries have painstakingly built over decades.

"The ruling is unthinkable in light of international law," Japanese Prime Minister Shinzo Abe said of the high court's decision to order Nippon Steel to compensate Korean nationals forced to work for the company during World War II. Abe said that Tokyo would respond "resolutely."

Nippon Steel issued a statement calling the decision "deeply regrettable" and contrary to the agreement signed by Japan and South Korea in 1965 when the two countries normalized diplomatic relations. The agreement stated that all claims regarding the "property, rights and interests" of both countries and their citizens were "settled completely and finally."

The Japanese government has taken this to mean that all individual claims to compensation, including those from Koreans forced to work for Japanese businesses during the war, were resolved.

Japanese Prime Minister Shinzo Abe speaks at the Upper House on Tuesday. Abe called the South Korea Supreme Court ruling 'unthinkable.' (Photo by Uichiro Kasai)

Nippon Steel said it will "carefully review the decision of the Supreme Court of Korea in considering its next steps, taking into account the Japanese government's responses on this matter and other factors."

Should Nippon Steel refuse to pay, the plaintiffs could ask the court to seize assets of the company in South Korea. The steelmaker operates a recycling joint venture in the country with Posco. A lawyer for the plaintiffs noted in a news conference after the ruling that Nippon Steel owns about 3% of its South Korean peer, apparently hinting that those shares could be subject to seizure in an effort to force the company to the negotiating table.

The high court's decision could affect related cases as well. Mitsubishi Heavy Industries now faces seven lawsuits related to the wartime labor issue. Like Nippon Steel, it maintains that all compensation claims were settled with the 1965 agreement.

"We have no intention of changing our stance," a senior Mitsubishi Heavy official said.

A Nikkei survey of businesses potentially facing lawsuits found that many are aware of the possibility of a suit, but have not been served with a complaint. Nippon Steel's loss might spur more cases to go to court.

Companies that refuse to pay reparations demanded by the court may risk having assets seized not only in South Korea, but in other countries as well.

While Japanese courts are unlikely to go along with any petition to do so, third countries, such as the U.S., may be another story. "From the U.S. standpoint, it's simply a lawsuit between private entities," an expert on international law said, adding that courts there could permit assets to be seized if they have not followed the postwar sensitivities between the two countries.

Tokyo fears that the 1965 agreement -- which settled the issues arising from Japan's colonization of Korea and formed a cornerstone of the normalization of diplomatic ties -- may be rendered a dead letter. That could unravel the postwar understanding underpinning a relationship that has deepened to the point of interdependence.

Everything rests on "the assumption that the South Korean government will maintain its 2005 stance," said a Japanese government insider familiar with the situation.

In 2005, the liberal administration of then-President Roh Moo-hyun concluded that the $300 million in aid that Japan provided under the 1965 treaty between Japan and South Korea took into full consideration the funding needed to settle the labor issue. It also indicated that South Korea should be responsible for resolving demands by former laborers for compensation from Japanese companies.

But in 2012, the South Korean Supreme Court overturned a ruling in favor of Japanese companies in wartime labor cases, sending them back to lower courts for trial, on the grounds that the 1965 agreement did not eliminate the workers' right to seek compensation.

The high court cited a lack of evidence that Tokyo and Seoul shared the same understanding of the matter, among other factors. It also addressed the accord itself, contending that it was based on a political agreement to resolve claims and liabilities and not a negotiation on compensation for Japan's colonial rule.

The court adhered to this view in Tuesday's ruling, acknowledging an individual's right to seek reparations.

South Korean Prime Minister Lee Nak-yon said on Tuesday that the government "respects" the Supreme Court's ruling, and that it will respond after considering various factors in consultation with the relevant agencies and private-sector experts. But he did not make clear whether Seoul still holds that individual claims are settled. The government hopes the Japan-South Korea relationship can move forward in a "future-oriented" manner, Lee said.

The 1965 agreement stipulates that any dispute over the "interpretation and implementation" of the deal "shall be settled, first of all, through diplomatic channels." Tokyo plans to follow this route and try to resolve the issue through bilateral talks with Seoul. If the two sides cannot reach an understanding, the dispute will go to an arbitration panel including an arbitrator from a third country.

Shifting public opinion in both countries could hurt consumer-oriented businesses.

"Business exchanges between Japan and South Korea are brisk, so we don't expect a negative impact on direct transactions between companies," said Koji Kakigi, chairman of the Japan Iron and Steel Federation and president of JFE Steel.

But "we must monitor public sentiment in South Korea," he said.

The issue could also affect Japan's chipmaking equipment manufacturers, as South Korea accounts for 40% of the industry's exports.

An insider at a Japanese trading house expressed concern that court rulings catering to the public would make it hard to keep doing business in South Korea. "We would have to be more cautious about investing," the source said.

Tourism could suffer as well. The cheap, frequent flights between the two countries allow for convenient travel, but also make canceling relatively easy if the political and social winds shift. The number of Japanese nationals visiting South Korea dropped off sharply in 2015 as tensions flared up over the disputed islets that Japan calls Takeshima and South Korea calls Dokdo, as well as over wartime "comfort women."

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