South Korea's economy could suffer a setback from Japan's export restrictions, the finance minister said Thursday, as an escalating standoff between South Korea and Japan shows no signs of abating.
Japan has tightened regulations on exports to South Korea of three materials -- resist, etching gas and fluorinated polyimide -- essential for the production of semiconductors and flexible displays.
Japan has so far spurned South Korea's repeated calls for the lifting of the export restrictions.
Hong Nam-ki, minister of economy and finance, said South Korea is bracing for Japan's additional plan to remove Seoul from its so-called "white list" of nations subject to preferential export procedures on national security grounds.
Hong said the government is working on how to deal with a possible delisting, which could affect about 1,000 items.
"The Japanese move, if drawn out, could affect the economic growth rate," Hong said in a parliamentary session, an indication that South Korea may further revise down its growth prediction.
Earlier this month, South Korea slashed its economic growth outlook this year to between 2.4 percent and 2.5 percent due to weak exports and sluggish investment.
Earlier in the day, the Bank of Korea also cut its growth outlook for the economy to 2.2 percent from its previous forecast of 2.5 percent three months earlier.
Hong said the central bank appears to have partly taken into account the Japanese export restrictions in revising down its growth outlook.
South Korea will unveil a set of measures later this month to boost industrial competitiveness in a move to cope with Japanese restrictions of materials critical for the production of semiconductors and displays.
Hong said that South Korea will try to diversify import sources of key materials, parts and equipment, while pushing for localization of the materials.
As part the effort, the minister asked parliament to approve 300 billion won (US$254.6 million) in supplementary R&D budget that will be used in the parts and materials industry, in addition to the annual budget of 650 billion won, to boost the sector's competitiveness.
"As the situation is urgent, I hope parliament approves the extra budget (for the parts and materials industry) so action can be taken in the latter half of this year," Hong said.
The move is part of a broader effort to enhance competitiveness of the local supply chain to develop alternative sources to replace Japanese imports and diversify where it gets components in the long term.
The Japanese curbs have prompted Samsung Electronics, the world's largest memory chip maker, and its smaller rival SK hynix Inc. to try to find alternative supplies of the key industrial materials.
The Japanese export restrictions are widely seen as a retaliation against last year's South Korean Supreme Court rulings that ordered Japanese firms to compensate South Korean victims of forced labor during Japan's 1910-45 colonial rule of the Korean Peninsula.
Japan has lashed out at the ruling, claiming that all reparation issues stemming from its colonial rule were settled under a 1965 government-to-government accord that normalized bilateral relations.
In an attempt to justify its export restrictions, Japan has claimed that South Korea might have been negligent in the management of some dual-use items affected by United Nations resolutions against North Korea.
South Korea has flatly denied the allegations, denouncing Tokyo's claim as groundless and politically charged.
South Korea joined four multilateral export control regimes between 1995 and 2001.
In 2003, South Korea introduced a situational permit -- known as a "catch-all" system -- and has since added relevant regulations on a catch-all clause in the Foreign Trade Act to further strengthen the system.
South Korea's Foreign Trade Act requires exporters to obtain a situational permit for any goods, which are not listed as strategic items but may be used in weapons of mass destruction or their delivery system if exporters become aware that the importer or the end user of the goods has intent to use the goods for manufacturing, developing, using or storing WMDs, or suspects that there is probably such intent.
South Korea said it is stricter than Japan in applying the catch-all system.
A 2016 U.N. report said commercial radar antennas made by a Japanese firm were acquired and adopted by North Korea for its naval vessels, and some of them were seen during the North's test-firing of an anti-ship missile publicized in 2015 by North Korea's state media.(Yonhap)