SEOUL/TOKYO (Reuters) - Japan has approved shipment of a high-tech material to South Korea for the first time since imposing export curbs last month, but doubled down on political pressure and warned it could broaden restrictions on deliveries to its Asian neighbor.

FILE PHOTO: National flags of South Korea and Japan are displayed during a meeting between Komeito Party members and South Korean lawmakers at Komeito Party's headquarters in Tokyo, Japan, July 31, 2019. REUTERS/Kim Kyung-Hoon/File Photo

The approval and subsequent warning illustrate how Tokyo is ready to up the ante in the diplomatic row and yet unwilling to fully cut off exports to South Korea.

The dispute, rooted in their wartime past and exacerbated by the recent tightening of curbs on shipments of three high-tech components, has stoked nationalism and raised trade concerns.

Relations between the two U.S. allies worsened late last year as part of a decades-old dispute over compensation for forced laborers during Japan’s occupation. South Korea has invoked its difficult history with Japan, which colonized the Korean peninsula during World War Two.

“Usually, we don’t announce each time we give export permission. However, the South Korean government has referred to our moves as an embargo on exports, which is unfair criticism,” Japanese Industry Minister Hiroshige Seko told a briefing.

It is the first time since the export curbs were introduced last month that Japan has allowed shipment of one of the three high-tech materials, he said.

He was quick to add Tokyo would expand the curbs beyond the three specialized chemicals - fluorinated polyimides, photoresists and hydrogen fluouride - if there were any cases of “improper” use. Some of the chemicals, which are used to make smartphone displays and chips, can also be used in weapons.

Japanese officials have cited unspecified security reasons for their export curbs.

But they have pointed to an erosion of trust after South Korean court rulings last year ordered Japanese firms to compensate wartime forced laborers. Tokyo says the matter was settled by a 1965 treaty normalizing bilateral ties.

South Korea’s president, Moon Jae-in, said on Thursday that tighter curbs would undermine Japan’s international credibility and accused Tokyo of using its industrial advantage as a weapon against another country.

“Even if there are any gains, it will be short-lived. In the end it is a game without winners, where everyone, including Japan itself, becomes a victim,” Moon said.

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WHITE LIST

The high-tech material that has been just cleared by Japan for export is EUV photoresists, South Korean Prime Minister Lee Nak-yon said. The chemical is crucial for Samsung’s advanced contract chipmaking production.

Samsung declined to comment.

But it remains unclear if this approval from Tokyo signals a breakthrough in trade relations.

“They approved only one out of a number of items,” a South Korean senior trade ministry official pointed out.

A presidential official said: “It doesn’t mean that uncertainties have been completely removed for the other items.”

Japan has removed South Korea from the “white list” of countries with fast-track trade status, meaning some exporters may have to go through a lengthy permit application process to ship restricted items to South Korea.

That covers a broad range of items, including those applicable to weapons production and machine tools.

South Korea, which was scheduled to take a call on a plan to drop Japan from its “white list” on Thursday, has, however, put off the decision until further discussions.

But the country has said it plans to tighten regulations on imported coal ashes, mostly from Japan, used to produce cement, and has proposed tax benefits for local firms in case they need to buy foreign chemical makers as Seoul tries to cut reliance on Japan.

South Korea’s national security council meeting took place on Thursday where members agreed to review measures to deal with Japan’s “retaliatory” actions, but continue to try to resolve the issue via dialogue, according to the presidential office.

The curbs have also prompted concern among corporate Japan.

“This situation benefits neither Japan nor South Korea,” Masashi Oka, senior executive vice president at Nikon, told a recent briefing. “We strongly hope that both countries can return to normal economic activity as soon as possible.”

Given the curbs in place, Japan’s approval to export the three materials could take up to 90 days, slowing shipments.

VITAL LINK

The export curbs highlight how Japan controls a vital link in the global supply chain. It remains a major player in specialized chip components, even though it was overtaken as a chipmaker years ago by South Korea.

At a New York event for a new flagship phone launch, the head of Samsung’s mobile division told reporters he could not rule out a potential impact on the supply chain for smartphone production if the curbs dragged on for more than four months.

Shares of Tokyo Ohka Kogyo rose 3.9% and Stella Chemifa surged 10.1% after the latest export approval. Tokyo Ohka Kogyo makes photoresists and Stella Chemifa produces hydrogen fluoride, both materials affected by the export curbs.

South Korean chipmakers are hitting a dead end in their quest to find alternatives for key Japanese materials that have been slapped with restrictions, raising the prospect of major disruption to their operations in coming months.