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Photographer: Toru Hanai/Bloomberg Photographer: Toru Hanai/Bloomberg

Japan moved to cut off materials vital to South Korea’s all-important tech industry, escalating a long-running dispute between the neighbors over events dating back generations.

Prime Minister Shinzo Abe’s government said Monday it would slap export restrictions on highly specialized products needed to make semiconductors and computer displays, and might also remove South Korea from a list of trusted buyers. The move comes after South Korean courts ruled that Japanese companies must compensate Koreans conscripted to work in factories and mines during the 1910-45 colonization of the peninsula.

Sung Yun-mo Photographer: SeongJoon Cho/Bloomberg

South Korea called in Japan’s ambassador in Seoul to protest the action, and said it would file a complaint with the World Trade Organization. Sung Yun-mo, South Korea’s Minister of Trade, Industry and Energy, told reporters the measures were “retaliation” for South Korean court rulings, and vowed to take “necessary steps” under domestic and international law.

“It’s a statement of how incredibly frustrated Tokyo is in dealing with Seoul,” said Brad Glosserman, deputy director of the Center for Rule-Making Strategies at Tama University. “The belief in Tokyo is that the South Koreans are forever going to move the goalposts and seek to maintain the moral and political high ground, and thus Japan is not prepared to make a deal for fear that it will never be a final agreement.”

The news weighed on shares of chip companies and display makers in South Korea, where exports of those products account for one-fifth of the the total. Semiconductor exports were already under pressure, plunging 26% in June from a year earlier, amid slowing demand and escalating concerns over the much larger global trade dispute between the U.S. and China.

In June, Japan rejected a South Korean proposal for a joint compensation fund to resolve the dispute over the forced labor claims, ratcheting up friction between the two U.S. allies. Tokyo said the offer doesn’t abide by the terms of a 1965 treaty that normalized ties and states that matters of compensation are “settled completely and finally.” That agreement was accompanied by a $300 million payment. Japan has sought to resolve the dispute using arbitration, citing treaty terms.

Japanese Deputy Chief Cabinet Secretary Yasutoshi Nishimura denied Japan was seeking to retaliate, and said the plans were in line with WTO rules.

The chill between Japan and South Korea was on display at the Group of 20 leaders summit hosted by Abe last week in Osaka. South Korean President Moon Jae-in was conspicuously absent from the long list of world leaders who had one-on-one meetings with the Japanese prime minister.

Why Japan and South Korea Still Spar Over History: QuickTake

Removing South Korea from a list of 27 so-called “white” countries -- most of them members of North Atlantic Treaty Organization -- would be unprecedented. South Korea was added in 2004, according to an official with Japan’s Ministry of Economy, Trade and Industry, who asked not to be named in line with government policy. The ministry called for public comment on the move.

The move could potentially backfire. “If the restriction persists, it may serve as an impetus for Koreans to speed up development of internal production capacity for these products,” Nomura Holdings Inc.’s analysts Shigeki Okazaki, Kaori Iwasaki and Zhang Yifan wrote in a report. Japan’s “government may not want to let this drag on,” they said.

From Thursday, Japan will require export licenses for three materials necessary to manufacture displays and semiconductors. One is fluorinated polyimide, a synthetic resin that’s used as a substrate in flexible organic light-emitting-diode screens. Also targeted are resist polymers and hydrogen fluoride, which are used to imprint and etch chip circuits on silicon wafers.

Japanese companies control 90% of the polyimide market for screen applications, with the majority split between Ube Industries Ltd. and Kaneka Corp., according to market researcher Display Supply Chain Consultants. Samsung Electronics Co. and LG Display Co. dominate the market for OLED screens used in smartphones and televisions. The companies have been exploring the use of bendable panels to boost demand in the increasingly saturated market.

“Japanese companies have an oligopoly on polyimide supply,” said Yoshio Tamura, who heads Asia operations at Display Supply Chain Consultants. “Without Japanese products, LG and Samsung won’t be able to make flexible OLED screens.”

Samsung Electronics said it’s looking into the matter, while SK Hynix and LG Electronics declined to comment. LG Display said it doesn’t use fluorinated polyimide imported from Japan at the moment, but would be affected by any restrictions on supply of hydrogen fluoride.

LG Display fell 2% by the close after retreating as much as 3.6% and Samsung dropped 0.9% even as most of the tech sector was buoyed by the break in the U.S.-China trade war. Among Japanese suppliers of the affected products, Stella Chemifa Corp. fell 2.3% and JSR Corp. dropped 2%. Meanwhile Korean supplier SoulBrain Co. climbed 4.7% and SK Materials Co. added 3%.

Japan’s action follows similar moves by U.S. President Donald Trump, who has harnessed tariff threats and export restrictions to wage a host of trade battles since taking office in 2017, said Deborah Elms, executive director of the Asian Trade Centre. She called the move “another symptom of the collapsing trade regime.”

— With assistance by Shinhye Kang, and Sohee Kim