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Japan-South Korea rift

Bank of Korea ready to act on fallout from Japan export curbs

Central bank lowers rate to 1.5%, joins global trend to ease monetary policy

The Bank of Korea in Seoul. The central bank on Thursday shifted its direction in the eight months since November, when it raised the benchmark rate by 25 basis points to 1.75%.   © Reuters

SEOUL -- The Bank of Korea is ready to take action to limit any damage stemming from Japan tightening export controls of key materials to South Korea's chipmaking industry.

Speaking on Thursday after the central bank cut its key lending rate to 1.5% from 1.75%, BOK Gov. Lee Ju-yeol told reporters in Seoul that he was monitoring the situation and "will do something if needed."

"Considering the trade volume between South Korea and Japan and the connectivity between industries and companies, if export restrictions are realized and expanded, we cannot say that its impact on exports and the economy is small," Lee said. "But I cannot explain how big the impact will be because it is too early to predict how it will unfold."

Also Thursday, the BOK slashed its growth forecast for 2019 to 2.2% from 2.5% as the domestic economy feels the weight of the U.S.-China trade war. Lee said that the new projection partly reflects Japan's export restrictions.

Tokyo announced earlier this month that it is restricting exports of three key semiconductor manufacturing materials to South Korean companies without government approval, raising sensitive questions over Seoul's management of the materials and their possible smuggling into North Korea.

The World Trade Organization has agreed to formally discuss Seoul's complaints over Tokyo's restrictions. South Korea had been lobbying the WTO to address the issue, saying the export curbs were a violation of the international body's rules.

Moreover, Japan plans to exclude South Korea from its "white list" of countries, which benefit from a simplified export process.

"That will be a very, very significant act," a South Korean government source said on condition of anonymity, regarding the possible exclusion from the list. "It will cause tremendous problems."

Economists at Oxford Economics wrote in a note on Wednesday that a 10% fall in semiconductor production could see growth slow to an average 1.6% in 2019-2020.

The government in Seoul is considering spending 1 trillion won ($850 million) a year to support domestic production of chipmaking equipment and materials. Without giving specifics, Economy Minister Hong Nam-ki said Wednesday that Seoul will soon announce a package to deal with the restrictions.

Japan and South Korea have long been at odds over historical issues, with Tokyo's export restrictions on materials to South Korean chipmakers the latest source of tension between the two U.S. allies.   © Reuters

The BOK's easing step on Thursday is a shift in direction after raising its key rate in November by 25 basis points to 1.75%.

The move is in line with global peers. Australia, India, Malaysia, the Philippines and other countries have all lowered rates over the past few months, Indonesia is likely to ease later Thursday, and U.S. Federal Reserve Chairman Jerome Powell has hinted at a rate cut later this month.

Analysts say they expect one additional rate cut before the end of the year as South Korea faces a wide range of risks, including effects from the trade war and a ballooning jobless rate at home. The number of unemployed people stood at 1.137 million in June, its highest level in 20 years.

In its policy statement on Thursday, the BOK said it would "maintain its accommodative monetary policy stance" because domestic economic growth will be moderate and inflationary pressures remain low.

"In this process it will carefully monitor developments such as the U.S.-China trade dispute, Japan's export restrictions, any changes in the economies and monetary policies of major countries, the trend of increase in household debt, and geopolitical risks, while examining their effects on domestic growth and inflation," the BOK said.

Also posing a challenge for the government: South Korea's economy contracted 0.4% in the first quarter compared with the previous quarter, mainly due to declining exports.

We "expect the U.S. to impose 25% tariffs on the remainder of U.S. imports from China by the end of 2019," said Minoru Nogimori, a research analyst at Nomura. "Along with this, domestic headwinds -- including a higher unemployment rate, a housing market correction and household-debt deleveraging -- remain a burden to the [South Korean] economy."

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