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International relations

Japan sanctions threat on South Korea sparks supply chain fears

Companies on both sides worry about further deterioration in vital trade relationship

A Samsung chipmaking facility in Hwaseong. The South Korean group depends on Japanese suppliers. (Photo courtesy of Samsung Electronics)

SEOUL -- The prospect that Japan could impose economic sanctions on South Korea over a legal dispute concerning wartime labor cases has raised anxiety in Seoul and among companies on both sides that depend on cross-border supply chains.

South Korea's Foreign Ministry said Wednesday that Kim Yong-kil, director-general for Northeast Asian affairs, will meet here Thursday with his Japanese counterpart Kenji Kanasugi to discuss the issue, in which Japan-based industrial groups have been ordered to compensate forced-labor victims

The two senior diplomats may discuss a sanctions threat issued by Japanese Finance Minister Taro Aso this week that set off alarm bells.

Japan could take "various retaliatory measures" against Seoul, "including not only tariffs, but also halting remittances and visa issuances," Aso told lawmakers on Tuesday.

This reflects the level of frustration in Tokyo over South Korean court decisions ordering Mitsubishi Heavy Industries and Nippon Steel & Sumitomo Metal to compensate Koreans forced to work for them during World War II. A court approved the seizure of Nippon Steel assets in South Korea, and plaintiffs have filed a similar request for Mitsubishi Heavy.

Stopping cross-border money transfers could cause serious problems for companies that do business in both countries. Suspending visa issuance would risk a plunge in the number of South Korean visitors to Japan -- which came to 7.53 million last year -- and the economic benefits they bring through their spending.

Another proposal raised in Japan would restrict exports of strategic materials such as hydrofluoric acid, which is essential to semiconductor production, according to South Korean media.

"There's a division of labor between Japanese and South Korean industry. If South Korea stumbles, so will Japan"

Japanese semiconductor equipment executive

"We haven't received any notification of economic retaliation by Japan, but we are taking all precautions," a senior South Korean government official said Wednesday.

Japan "probably won't actually go that far," a Japan-South Korea diplomatic source said of Aso's comments. But the possibility is still making businesses nervous.

Seoul is not rushing to deal with the forced-labor issue in part because Japan has grown less important as a buyer of South Korean goods. It ranked as the country's fifth-largest export destination in 2018, down from No. 2 in 2000, as China has gained prominence.

Yet leading South Korean companies, including Samsung Electronics and SK Hynix, still rely on parts and materials from Japan. South Korea reported a $24 billion trade deficit with Japan last year, its largest with any country.

And for Japanese businesses, South Korea is often a lucrative market. A survey late last year by the Japan External Trade Organization of Japanese companies operating in Asia and Oceania found that 85% of those in South Korea expected an annual operating profit there, compared with 72% in China and 67% in Thailand.

The fallout from high tariffs or other trade barriers would hit businesses on both sides.

"There's a division of labor between Japanese and South Korean industry," said an executive at a Japanese company that makes materials used in chip production. "If South Korea stumbles, so will Japan. It would also have serious consequences for global supply chains."

Seoul has said it will take steps to address the matter but has yet to announce them. Japan, which holds that all such claims were settled by a 1965 agreement, has asked South Korea to hold talks under that framework but has not received a response.

The diplomatic chill has also cast a shadow over cross-border relationship-building among businesses.

The leaders of the Japan-Korea Economic Association and its South Korean counterpart decided this month to delay a May meeting of business leaders until September or later. This follows the postponement in November of an annual meeting of the two countries' chambers of commerce.

The latest delay was requested by the South Koreans, sources familiar with the situation said. Bilateral relations could deteriorate even further by May, with South Korea possibly seizing Japanese companies' assets and Tokyo imposing punitive measures. South Korean business leaders apparently worried about seeming out of step with the government if they played up stronger ties with their Japanese counterparts.

The situation is similarly vexing for Japanese companies in South Korea. Though they may be outraged by the forced-labor rulings, they want to keep the blowback from hitting their own businesses.

The Seoul Japan Club, South Korea's largest community of Japanese nationals, avoided touching on the forced-labor issue in its annual list of recommendations to the South Korean government. A proposal at last December's board meeting on whether to express concern about the rulings and urge Seoul to take appropriate action failed by a narrow margin.

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