South Korean stock market slumps over diplomatic dispute with Japan

11, Jul. 2019

SEOUL, NNA - South Korean stocks have slumped over the prospect that Japan’s trade restrictions will hurt the country’s semiconductor industry and its export-reliant economy as global growth has already been dampened by the U.S.-China trade spat.

The Korea Composite Price Index (KOSPI) lost nearly 4 percent from the start of July until Tuesday, before posting a modest rebound on Wednesday.

Last week, Tokyo tightened guidelines on exports of three materials crucial to making chips for smartphones and screens, protesting against the decision by the South Korean supreme court requiring Japanese firms to compensate South Korean workers forced into labor during World War Two.

The tension between the two countries heighted last week when Japanese media quoted an unidentified senior member of the ruling Liberal Democratic Party as saying hydrogen fluoride exported to South Korea was ultimately shipped to North Korea. The key material for making chips can also be used in chemical weapons.

Japan has said it has seen “inappropriate instances” of South Korea violating export controls, but it did not elaborate, according to press reports.

Seoul has taken the case to the World Trade Organization.

When Japan announced the tighter export controls on July 1st, the KOSPI closed at 2,129.74, little changed from the previous trading day. However, the index had lost 3.7 percent by July 9, closing at 2,052.03.

The Kosdaq index of small businesses also fell 4.34 percentage points to 666.07 during the same period.

Samsung Electronics Co.’s share price dropped 5.5 percent to 44,400 won between June 28 and July 8, while the price of chips supplier SK Hynix Inc. tumbled by 3.0 percent.

Amid sluggish global demand for semiconductors, companies like Samsung and SK Hynix have ample reserves of chemicals used in chip making but could feel the pinch if Japan’s tough trade stance continues.

South Korean President Moon Jae-in later has called on Japanese Prime Minister Shinzo Abe to drop the export restrictions, adding that Seoul would consider counter-action if the restrictions cause damage to South Korean firms.

The heightened diplomatic tension between the two neighbors has also pushed down share prices in the air transportation industry with concerns about the number of travelers.

Some South Korean securities firms have cut their earnings guidance for listed South Korean firms, including LG Display Co., for the second half of the year.