Argument

Japan Started a War It Wasn’t Ready to Fight

Tokyo picked a trade brawl with Seoul—but wasn't prepared for the inevitable blowback.

South Korean protesters participate in a rally to denounce Japan's new trade restrictions on South Korea in front of the Japanese embassy on August 03, 2019 in Seoul, South Korea.
South Korean protesters participate in a rally to denounce Japan's new trade restrictions on South Korea in front of the Japanese embassy on August 03, 2019 in Seoul, South Korea. Chung Sung-Jun/Getty Images

Japan’s growing economic conflict with South Korea represents more than another challenge to wobbly world growth—it also portends a shift in how the nation conducts its foreign policy. Throughout the postwar period, Japan has been considered a geopolitical soft touch, known for two dominant strategies: trying to damp down controversy by always urging compromise and putting economic and business interests first. Japanese Prime Minister Shinzo Abe now appears ready to change that—although his early efforts at executing the strategy suggest his government needs more practice.

The dispute, at least on the surface, is over two fairly technical decisions by Japan. On July 1, it said that it would require individual export approvals for three classes of chemicals used in semiconductor manufacturing in which Japan is the dominant provider, with South Korea’s tech giants Samsung Electronics and SK Hynix among the biggest buyers.

Even as South Korea protested that the move risks an upheaval of the supply chain for electronics goods, Japan last Friday took the broader step of removing South Korea from Japan’s so-called white list of 27 countries that are deemed to have proper controls on sensitive items that could have a military application.

Japan has repeatedly insisted that it has evidence that South Korea has not taken proper precautions to prevent the export of these products to third countries. Despite media reports that this involves North Korea, sources say the countries involved are in the Middle East. Japan has also said angrily that it has been trying to get South Korea to discuss the topic for months at least, only to be rebuffed.

South Korea denies this and has strongly condemned Japan’s measures. It wants to take the issue to the United Nations, which oversees North Korea sanctions, and has lobbied the World Trade Organization, calling the move a violation of global trade rules. At the same time, South Koreans have taken up the cause with a broad boycott of Japanese consumer goods and widespread cancellations of trips to Japan.

Behind all this is a clear desire by Japan to put pressure on Seoul over a continuing dispute over forced wartime labor when Japan ruled Korea as a colony up to 1945. Japan is upset that South Korea has allowed former workers to sue for damages. Tokyo contends that such civil action was precluded by the 1965 agreement restoring relations between the two countries and says the $500 million it paid in compensation at that time was meant to cover such cases. South Korea also declined to hold negotiations that Japan says are provided for in the 1965 agreement that are meant to sort out such disputes.

According to people close to the government, Abe was highly frustrated with the situation and was looking for a weapon he could use. He settled on the export issue, which had been under the jurisdiction of the Trade Ministry and had been an area of concern for some time. At that point the powerful Cabinet Office took over. The result has not been a good one. Various parallels have been drawn with Abe’s actions and U.S. President Donald Trump’s use of trade as a weapon, and in a similar vein, the announcement last month has seen a Trump-style mixture of statements, re-statements, and shifts in strategy within the government.

Basic public relations knowledge would suggest that announcements of this kind should be accompanied by at least some evidence of your reasons, background briefings to specialized media and diplomatic representatives to build your case, and, most importantly, a clear and consistent line of what is going on. All information for public release should be channeled through one office to ensure consistency, and there should be one public face for comment. Finally, contingency plans should be in place to handle unexpected developments (a boycott of your nation’s goods would be high on the list).

Instead, we saw a variety of often conflicting statements and vague innuendo from Japanese officials.

The basic case for the action is fairly prosaic. Japan can say that, acting within its rights of any exporting country, it is telling the suppliers that they will need to seek individual licenses for each shipment of the materials. Officials could point out that Japan already uses the same system with China, which, along with the United States, is the country’s biggest trading partner, without any evident ill effects. Neither China nor chip producer Taiwan are on Japan’s white list.

The Japanese government should also have been prepared for a fair amount of blowback. Samsung accounts for about 15 percent of South Korea’s total GDP; any government would refuse to roll over in the face of a threat to its key businesses. Faced with Seoul’s reaction, the Japanese government has lurched back and forth. While Trade Minister Hiroshige Seko has stressed the technical aspects, saying this is only about national security issues, his bosses have been out feeding the very suspicion that he has been trying to damp down.

Chief government spokesman Yoshihide Suga, who heads the Cabinet Office, has said that while the export controls were for “national security reasons,” he has also dangled the notion that South Korea “did not offer a satisfactory solution over the issue of former workers on the Korean Peninsula before the Group of 20 summit and we cannot help but to say the relationship of trust has been severely damaged.”

After the government started pushing the national security concerns, Abe switched tack, going back to the wartime issues. “South Korea, with its handling of the former Korean wartime laborers issues, clearly demonstrated that it is a country that does not keep promises. Naturally, we have to assume it also fails to keep promises on export controls,” he said on a television talk show.

It’s not clear if Abe and Suga foresaw the breadth of the potential economic fallout. Japan’s Uniqlo chain of clothing stores, for which South Korea is an important market, has seen sales fall nearly 30 percent at its more than 180 stores there. Big brewers such as Asahi have seen similar declines as many stores refuse to stock Japanese beer on the shelves. Previously, Japanese beer had been the most popular foreign brand in the market. South Korean tourism to Japan has fallen about 50 percent in recent weeks, according to South Korean travel agents. At 7.5 million last year, South Koreans were the largest number of foreign tourists in what has become an important revenue earner for Japan.

Overall, South Korea has been Japan’s second-largest trade surplus nation, after the United States, with a surplus last year of around $20 billion. South Korean President Moon Jae-in left little doubt that the economic battle lines were now drawn. “We won’t be defeated by Japan again,” Moon told his cabinet in a nationally televised meeting on Friday.

Others see the economic impact on either nation as minimal. Goldman Sachs noted that most exports are not covered by Japan’s measures, at least if South Korean corporate customers are still willing to buy. In addition, despite the close trade ties, Japanese companies have not been big investors in South Korea, therefore they have relatively little longer-term risk. Based on Bank of Japan data for the year ending in March, South Korea accounted for 2.3 percent of the global total for outbound investment and about one-tenth the flow that went to the United States. Japan’s corporate leadership has meanwhile been subdued over the dispute and appears generally supportive of Abe’s actions despite the potential costs. The head of the Japan Association of Corporate Executives, Kengo Sakurada, said that the business sector in Japan wants relations to “return to normal” as soon as possible. Speaking privately, one senior business executive said that it was not Abe who was taking an aggressive line. “It is South Korea that has overstated what is going on and has made inaccurate comments on the effect to the world economy,” he said.

Potentially more worrying for corporate Japan in the longer run is whether Samsung and others will carry through with threats to switch supplies from Japan to more “reliable” sources. The South Korean government announced Monday that it was setting up a $6.4 billion fund to reduce its reliance on Japanese exports. That might depend on whether Japan actually holds up exports after the dust settles, as such an investment would take considerable time and money, experts say.

Despite the risks, Abe doesn’t seem ready to compromise. Japanese Foreign Minister Taro Kono gave a public dressing-down to South Korean Ambassador Nam Gwan-pyo, who had repeated Seoul’s idea of a joint fund to handle the wartime workers, an idea already rejected by Tokyo. “It is extremely rude for you to propose it again as if you knew nothing about that,” he said on Friday as the television cameras rolled.

This contributed to the appearance that Tokyo is the one taking an extreme line. The ambassador, a close ally of Moon, had just last month given a highly conciliatory interview with the Asahi newspaper upon taking his post, talking about how he wanted to improve relations and adding that “diplomats will need to do their best to avoid chilling the entire relationship.”

Ironically, it has fallen to the Trump administration to try to sort out the mess. Even the normally combative U.S. National Security Advisor John Bolton, who came through the region, declined to push the two sides together. Similarly, U.S. Secretary of State Mike Pompeo couldn’t get Kono and South Korean Foreign Minister Kang Kyung-wha to budge at a three-way meeting on the sidelines of an Asia security forum in Bangkok. The United States has said it wants both sides to try to work together but has refused to become the mediator, even though the next step in the drama might be the most serious from Washington’s perspective: a decision from South Korea over whether it will cancel a 2016 intelligence-sharing agreement.

For Abe, fresh off an election victory that saw his party keep a firm hold on the upper house of the nation’s parliament, the landscape is now quite complicated. He is largely left out of the talks over North Korea and been rebuffed in his bid for a summit with North Korean leader Kim Jong Un. He needs the United States now for both Koreas but is facing calls for help in patrolling the Strait of Hormuz and is facing strong demands from Washington for a quick trade agreement. He should also be ready for a fresh challenge from the China-Russia alliance. After the two countries’ foray over the Dokdo Islands, controlled by South Korea but claimed by Japan as Takeshima, could an overflight of the remote Senkaku Islands controlled by Japan but claimed by China as the Diaoyu Islands be next? Strong-arm politics can be awfully tricky. Abe may soon have a better appreciation for the value of a low profile and the old saying that “politics is bad for business.”

William Sposato is a Tokyo-based writer who has been following Japan’s economy and financial markets for more than 15 years.

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