By Joyce Lee

SEOUL (Reuters) – South Korea can overtake Japan economically by cooperating with North Korea, South Korean President Moon Jae-in said on Monday, amid an escalating trade row between Seoul and Tokyo.

On Friday, Japan cut South Korea from a list of countries that have fast track export status, having last month curbed exports of materials used in semiconductor production. Relations between the two U.S. allies have become increasingly fraught in the wake of row over forced labour during Japan’s occupation of the Korean peninsula before and during World War Two.

South Korea needs “a wider view and extraordinary determination” to overtake the Japanese economy, Moon said in a meeting with senior aides.

“If inter-Korean economic cooperation leads to a peace-driven economy, we will be able to catch up to Japan’s dominance,” he said.

A “peace-driven economy” is Moon’s vision for inter-Korean economic cooperation, based on North Korea’s denuclearisation and relief from sanctions.

Moon’s efforts to engage with North Korea have been stalled since a second meeting in Hanoi in February between North Korean leader Kim Jong Un and U.S. President Donald Trump fell apart without any agreement on dismantling Pyongyang’s nuclear programme.

When Trump and Kim met again in June on the border between the two Koreas, Moon did not join their private meeting. And North Korea has been largely unresponsive to recent South Korean overtures such as an offer of rice as humanitarian aid and cooperation in sports.

Still, North Korea is a regular critic of Japan, and state media have repeatedly run items criticizing Japan’s stance on the forced labour issue, or describing South Koreans’ protest or boycott of Japanese products.

South Korea on Monday announced plans to invest about 7.8 trillion won (£5.33 billion) in research and development for local materials, parts and equipment over the next seven years in an effort to cut the reliance on Japanese imports.

(Reporting by Joyce Lee and Ju-min Park; Editing by Simon Cameron-Moore)