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Japan-South Korea rift

Japan-South Korea: Icy diplomacy threatens ever-better business ties

74 years after WWII, neighbors face crisis of 'cold politics, cold economics'

Anti-Japan protests and a spreading boycott in South Korea are casting a pall on Japanese business interests. (Montage by Hidechika Nishijima)

SEOUL -- Japanese-South Korean relations have long been uneasy due to the painful legacy of Japan's colonial rule, but for the most part the countries' political clashes have not damaged their common business interests. Now, as both sides mark the 74th anniversary of the end of World War II -- when the occupation ended --  that appears to be changing.

This time, tensions over historical grievances and trade threaten to chill both diplomatic and economic ties.

The relationship took a serious turn for the worse last fall, when a South Korean Supreme Court ruling set the stage for forcing Japanese companies to pay reparations for using wartime labor. More recently, with the labor issue still unresolved, Japan imposed trade controls on South Korea on security grounds, prompting retaliation from Seoul.

Protesters are converging on central Seoul to hold anti-Japan rallies every weekend, and a boycott of Japanese products is spreading. Uniqlo, the casualwear chain run by Japan's Fast Retailing, is a prime target: The company had 187 outlets across South Korea as of the end of July, but foot traffic has been sparse.

One source close to Uniqlo said the retailer "is proceeding with inventory adjustments at its outlets" in anticipation of a prolonged boycott.

A Sapporo Breweries joint venture in South Korea, meanwhile, saw sales plunge 70% in July, prompting the Japanese brewer to consider suspending operations for about four days a month. Rival Japanese players Kirin and Asahi Breweries have voluntarily stopped airing TV commercials in the country.

Mutual tourism has been a particularly bright spot in the relationship in recent years, with the number of travelers jetting between the countries surpassing 10 million for the first time in 2018. But since March, the number of South Korean visitors to Japan has been falling at year-on-year rates of 5% to 11%.

This is a stark difference compared with past periods of tension. Ties worsened in the 2000s after former Japanese Prime Minister Junichiro Koizumi made repeated visits to Tokyo's Yasukuni Shrine, which is dedicated to Japan's war dead. Relations soured again after former South Korean President Lee Myung-bak visited disputed Sea of Japan islets known in his country as Dokdo and in Japan as Takeshima.

Former South Korean President Lee Myung-bak's 2012 visit to these disputed islets claimed by Japan caused diplomatic friction, but economic relations were largely unscathed.    © Reuters

Yet, the number of travelers departing from South Korea for Japan rose in both 2012 and 2013, while the value of bilateral trade increased about 11% in 2013.

"Since economic relations are on a firm footing, the two countries can fight on the political front without worry," one diplomat involved in Japan-South Korea relations said at the time.

As South Korea overcame the 1997 Asian financial crisis and revved up its growth, the two countries' economies became increasingly intertwined, with the Japanese side supplying parts and materials to South Korean manufacturers of finished products, like Samsung Electronics.

Some observers dubbed the relationship a case of "cold politics, hot economics" -- meaning no matter how icy things get between Tokyo and Seoul, business would continue as usual.

But today the countries appear to be descending into a crisis of "cold politics, cold economics."

"I don't want the governments to bring political issues to the economy and put a burden on companies"

President of a Japanese chemical company

Last October, South Korea's Supreme Court ordered Japanese steelmaker Nippon Steel to pay damages over wartime labor. A number of other Japanese companies face similar lawsuits, and Tokyo fears Seoul may proceed to sell assets seized from the companies for compensation.

In July, Japan slapped controls on South Korean exports of three high-tech materials, citing a lack of trust. And on Aug. 2, Japan's cabinet decided to remove South Korea from a "white list" of nations granted preferential trade status. In turn, South Korea announced on Monday that it would remove Japan from its own white list in September.

Some experts warn that under the circumstances, Japan might block South Korea from joining negotiations on the reworked Trans-Pacific Partnership trade pact or refuse to renew currency swap agreements.

Companies on both sides of the divide find themselves doing business under a dark cloud.

A representative of Japanese plant engineering company JGC, which builds floating liquefied natural gas plants with Samsung Heavy Industries in South Korea, expressed concern that South Korea might tighten up on visa issuances for its employees working there.

An anti-Japan rally in Seoul on Aug. 10.   © Getty Images

The president of a Japanese chemical company complained, "I don't want the governments to bring political issues to the economy and put a burden on companies."

The value of trade between Japan and South Korea dropped about 10% in the first six months of the year, though other factors like the U.S.-China trade war also played a role. The number of Japan's direct investments in South Korea also declined 20% on the year, to 148.

Part of the problem may be that, while Japan-South Korea trade doubled over the past two decades, South Korea has deepened relations with China even more. Its exports to China are now triple those to Japan in terms of value.

Put another way, Japan's relative importance to South Korea's economy has declined. Nevertheless, the countries have built invaluable business and human connections since the normalization of relations in 1965.

Some Japanese businesspeople remain hopeful. Toray Industries, which makes carbon fiber materials in South Korea, is "not feeling an overly significant impact for now" because its products are industrial materials rather than consumer goods, according to Senior Vice President Toru Fukasawa.

A Mitsubishi Corp. project with South Korea's Doosan Heavy Industries & Construction and other players to construct a cutting-edge thermal power plant in Vietnam is proceeding as scheduled, according to a company insider.

Overall, however, economic bonds that have taken decades to cement now face an unprecedented risk from the spreading diplomatic frost.

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