TOKYO -- Japan's curbs on semiconductor material exports to South Korea have created an international fuss. But if South Korea's economy were strong, the fuss would not amount to much.
In 2011, after a big earthquake, tsunami and triple meltdown struck Japan's northeast region, Mitsui Mining & Smelting shut down one of its plants. At the time, the Japanese company controlled more than 90% of the market for ultrathin copper foil, which is essential to smartphone production.
The halt nearly made it impossible for South Korea's Samsung Electronics to make smartphones.
In the end, the stoppage had limited impact.
South Korea's economy had grown by 6.5% the previous year, rebounding from the global financial crisis. Earnings at automakers and other companies were on the rise.
Fast-forward eight years. Earlier this month, U.S. credit rating agency S&P Global Ratings slashed its growth forecast for South Korea to 2% from 2.4%. The sluggish economy could deteriorate further, dragged down by Japan, whose export curbs have spotlighted the South Korean economy's excessive dependence on China.
Exports, which account for 44% of South Korea's gross domestic product, took a 9% year-on-year tumble in the first six months of the year. Those to China dropped 17% over the same period as the Chinese economy deteriorated (China-bound exports accounted for 27% of all South Korean exports in 2018).
All along, the South Korean stock market has been sounding a quiet alarm.
Until a few years ago, market players around the world knew South Korea's benchmark Kospi as "Dr. Kospi." Ed Hyman, a noted economist and chairman of U.S. investment research firm Evercore ISI, popularized the nickname, noting that Kospi tracks key stocks in a nation that relies on exports and ships products to a broad range of countries.
But the term has fallen into obsolescence. Investors, an Everscore ISI economist said, no longer see the Kospi as a global bellwether.
Until 2008, the Kospi moved nearly in tandem with the GDP readings of Group of 20 countries. Since then, the index has underperformed G-20 GDP achievements. During the same period, South Korea grew more dependent on China. This is somewhat ironic considering China's economy has slowed to nearly 6% from 10.6% in 2010.
It does not look so ironic from a long-term view: South Korea and China normalized diplomatic relations in 1992, and the trend has been playing out ever since.
But many experts have voiced concerns that South Korea is growing excessively dependent on China, urging South Korean businesses to strengthen their ties with Japan.
One such voice is that of SaKong Il, an economist of global renown and a former finance minister. SaKong said in a written response that "we should increase our exports to other countries including, of course, the third-largest economy of the world, Japan."
But a diplomatic row between South Korea and Japan has expanded into a trade fight, and there is no way South Korean companies will consider trying to export more to Japan while Tokyo says it is mulling a tariff hike.
"I sincerely hope that the Japanese leadership would make special efforts to reverse the current policy posture and, at the same time, the Korean leadership should try hard to find solutions for complicated bilateral historical issues with forward-looking diplomatic cooperative endeavors instead of tit for tat retaliatory measures," SaKong said.
Investors have their own advice for Korea Inc. -- emulate Japan. An executive at a South Korean institutional investor suggests the country's trading houses take a page out of the playbook of their Japanese peers and start investing capital in infrastructure projects around the world.
In North America and Europe there is great demand for rebuilding airports, highways and other aging infrastructure. If South Korean trading houses were to participate in such projects, they could win direct returns and increase their exports to advanced countries.
This would help them lower South Korea's dependence on China.
South Korean trading houses mainly engage in unprofitable trade. Compared to South Korean chipmakers and auto manufacturers, they are relatively unknown. They need to make a big shift and focus on investing, the executive at the South Korean institutional investor said.
South Korea is already perusing Japan's playbook, specifically a 36-page document that was handed to the government in 1973. It is titled "Plan to Build Trading Houses in South Korea" and was written by Ryuzo Sejima, then vice president of Japanese trading house Itochu.
Sejima presented his opinion at the request of South Korea, which wanted to nurture trading houses in an effort to develop the country into an exporter. He later served as a secret emissary of Prime Minister Yasuhiro Nakasone, tasked with improving relations between the countries.
South Korean stocks have remained solid since Japan announced its export controls. Central banks' latest round of interest rate cuts have helped. Yet foreign investors, who own more than 30% of South Korean stocks, are fickle. And if Korea Inc. fails to implement reform measures, investor sentiment will deteriorate. "Patient Kospi" would then underperform other global indexes.
South Korea is already becoming less attractive as an investment destination, with foreign direct investment in the country dropping 37% on the year in the first six months of 2019. Companies cannot afford to have second thoughts about expanding exports with the support of the government and South Koreans.