Japan moved to cut off materials vital to South Korea’s tech industry, escalating a long-running dispute over colonial compensation into a threat to the core economic interests of its neighbor.
Japan plans to slap export restrictions from Thursday on a handful of highly specialized products needed to make semiconductors and computer displays, as a disagreement widens over claims of forced labor during the country’s 1910-1945 colonization of the peninsula. The key U.S. allies have been feuding over South Korean court decisions requiring Japanese companies to compensate Koreans conscripted to work in factories and mines.
The announcement 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.
Japan is following the U.S. in using cross-border commerce as a negotiating tool in disputes that reach beyond trade, said Deborah Elms, executive director of the Asian Trade Centre. She called the move “another symptom of the collapsing trade regime.”
U.S. President Donald Trump has harnessed tariff threats and export restrictions to wage a host of trade battles since taking office in 2017. Those disputes have included haggling with Mexico over immigration and disagreements with China over a range of issues, including alleged threats to national security.
The chill between Japan and South Korea was on display at the Group of 20 leaders summit hosted by Japanese Prime Minister Shinzo Abe last week in Osaka. South Korean President Moon Jae-in was conspicuously absent from the long list of world leaders who had bilateral talks with Abe.
Japan will require export licenses for three materials necessary in the manufacture of 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 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.”
LG Display slid as much as 3.6% and Samsung fell as much as 1.6% on a day when the tech sector led gains in Asian equities in the wake of the U.S.-China trade truce. Samsung was down 0.6% as of 2 p.m. in Seoul. Japanese suppliers also slumped, with Kanto Denka Kogyo Co., which makes chemical and metal products, down as much as 6.7%.
Removing South Korea from the white list, which currently consists of 27 countries—most of them members of North Atlantic Treaty Organization—would be unprecedented. South Korea was added in 2004, according to an official with the Ministry of Economy, Trade and Industry, who asked not to be named in line with agency policy. The ministry planned to call Monday for public comment on the move.
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.” Japan has sought to resolve the dispute using arbitration, citing treaty terms.
“If the restriction persist, 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.”
