Feel the love (not)! South Korea's President Moon Jae-in (left) shakes hands with Japan's then-Prime Minister Shinzo Abe on August 5, 2020. Photo: AFP

Japan and South Korea braced and held their breaths on Tuesday – then slowly exhaled, as a much-feared trade war between the world’s 3rd and 12th-largest economies failed to ignite.

August 4 was the date on which a Korean court in the town of Pohang, in southeastern Korea, was mandated to start the liquidation of Japanese companies assets seized in October 2018. The asset liquidation did not commence, with Japanese news reports stating that the company in question, Nippon Steel, was appealing the seizure.

While an appeal does not end the issue, it will likely take months to work through, granting breathing time for a resolution that would obviate a trade conflict between two major manufacturing economies.

The non-move by Korea and the very belated legal move by the Japanese company suggest that both parties seek to de-escalate – good news for a global economy that is already creaking under massive pressure from Covid-19 and is also facing the specter of a China-US decoupling.

Though the assets in question – shares of a joint venture between Nippon Steel and local steel maker POSCO – are worth a mere 973 million won ($813,000), Tokyo has taken an exceptionally strong stance on the matter.

Asia Times heard from a senior business figure with top-level contacts in both Korea and Japan in February, that were Korea to squeeze the trigger of asset liquidation, Tokyo would massively retaliate with industrial and financial sanctions. Japanese officials have strongly warned Korea not to cross the red line, and the South Korean press on  Monday was rife with speculation about what form Japan’s retaliation to an asset liquidation might take.

Some guesses include restrictions on exports of capital goods to Korean firms, many of which are reliant upon Japanese components; Japanese financial firms’ withdrawal from Korean stock markets; and visa restrictions on Korean citizens.

Intractable issue

The casus belli dates back to October 2018, when Korean courts seized financial assets of Nippon Steel – which at that time was named Nippon Steel and Sumimoto Metal – and Mitsubishi Heavy in South Korea. The assets were confiscated in order to pay damages to South Korean laborers who had been forced to work in Japan during the Pacific War, and who had filed suit in Korean courts.

Japan’s position is that the forced labor issue was settled via a 1965 treaty which had held firm for over half a century. Under that treaty, Tokyo and Seoul opened diplomatic relations, while Japan paid some $800 million in grants and loans in compensation for its colonial rule of the Korean Peninsula from 1910-1945. Documents made public in 2007 in South Korea showed that the amounts due to forced laborers had been exhaustively negotiated.

However, while Tokyo in 1965 paid the monies directly to the Seoul government, Seoul did not pay anything to the victims. Instead, it used the Japanese cash as economic development capital.

Though the judiciary, as part of the Korean state, is party to the 1965 treaty, the presiding judge in 2018 cited supra-national human rights standards for his judgement, and awarded damages to the Korean litigants regardless of the treaty.

Further complicating matters, many in today’s democratic South Korea question the bona fides of the 1965 South Korea government, which was led by an ex-general who had seized power via coup d’etat and ruled with harsh authoritarianism.

Japan’s Shinzo Abe administration, which had earlier seen South Korea’s Moon Jae-in’s government unilaterally dismantle a 2015 bilateral agreement designed to solve the long-running “comfort women” issue, accused Korea of being “untrustworthy” and of disrespecting international law.

Last year, Tokyo slowed exports of key chemicals needed by the Korean semiconductor industry and removed Korea from a list of privileged trade partners. Seoul responded by removing Japan from its trade “white list” while the Korean public boycotted Japanese products, retail outlets and travel. Meanwhile, Korean semiconductor firms diversified their supply chains.

That issue has now largely settled down. However, Tokyo’s 2019 action, which jolted Korea, is believed to be a shot across the bows compared to the real broadside it could unleash if the assets are liquidated.

What next?

Some prominent members of Moon’s Democratic Party have moved to defuse the crisis.

Former prime minister and likely 2022 presidential candidate Lee Nak-yon is believed to have negotiated behind the scenes. And former National Assembly Speaker Moon Hee-sang proposed a solution which did not proceed, largely due to disinterest from the presidential Blue House, a source told Asia Times.

“A joint fund, that would not be compulsory on the Japanese side, could have saved face for both Japan and Korea, and was the most ideal solution,” a senior, retired South Korean diplomatic official with extensive contacts in Tokyo, who spoke on condition of anonymity, told Asia Times. “I sounded out some Japanese in government and business and they were mostly agreeable, but it was sort of refused by the Blue House.”

While Tokyo has made clear its uncompromising stance, it is not entirely clear which direction Seoul will move in next.

Though many right wingers accuse President Moon of being a hard leftist, a communist or even a North Korean stooge, his course in international affairs has been marked by prudence rather than recklessness.

Despite his enthusiasm for inter-Korean exchange, he has not broken any international sanctions on North Korea. He also reversed a controversial decision to dissolve a bilateral intelligence-sharing pact between Seoul and Tokyo.

The latter U-turn is believed to have been made under US pressure. It is not known whether that was the case with Tuesday’s non-action on the asset liquidation.

Still, there is little common ground for Moon and Abe to stand on and both may have a cause for nationalist grandstanding. Moon’s political position was strengthened after his party handily won April’s legislative elections, but real estate and economic problems are now cutting into his ratings. Abe’s popularity ratings have fallen to the 30s amid the Covid pandemic in Japan.

So, risks simmer.

“Drawing out the legal process on seized corporate assets provides more time for a political compromise, but South Korean governments facing declining domestic support tend to fall back on patriotism against Japanese colonial atrocities,” said Leif-Eric Easley, an associate professor of international studies at Ewha Womans University. “Moreover, Tokyo’s incomplete atonement precludes recognition of contemporary policy mistakes in Seoul.”

He warned multiple bilateral issues – Korea’s referral of Japan to the WTO, and the Democratic Party’s appointment of a controversial activist who has shot down Tokyo’s attempts to resolve the “comfort women” issue as a sitting lawmaker; Japan’s opposition to Korea joining the upcoming G7 meeting, and its refusal to support a Korean candidate for WTO leadership  – present a combustible situation.

This may particularly be the case on August 15 this year – the 75th anniversary of Imperial Japan’s Pacific War defeat and Korea’s liberation.

“I’m not reassured,” the academic said. “I remain very concerned about Korea-Japan relations.”