Dokdo dispute spreads to economy

By Kim Tong-hyung

The diplomatic row between Korea and Japan over Dokdo, tiny Korean islets which Japan argues it has historical claim to, is beginning to show signs of developing into an economic flare-up.

Japan’s Finance Minister Jun Azumi threatens that the country may not extend its currency swap agreement with Korea, a key financial stabilizer for Seoul in times of trouble, in light of the recent visit to Dokdo by Korean President Lee Myung-bak that sparked angry reactions in the island nation. ``Oh yeah?’’ respond Korean government officials as they talk about shelving free trade talks with Japan.

The possibility of policymakers from each country moving from rhetoric to action seems miniscule. For example, canning the currency swap could backfire for Japan, as it would hurt the confidence in the Korean won and lead to a sharp decline in its value, which means that major Korean exporters in industries like consumer electronics and cars will be gaining price competitiveness over Japanese rivals.

And Koreans aren’t in a hurry to sign a free trade agreement (FTA) with their cross-shores neighbors anyway when Japan has been cementing a lopsided advantage in trade between the countries. Many Korean companies are still relying on high-tech components imported from Japan, which they use in their finished products shipped to China, the United States, Europe and other markets.

But although the verbal exchanges could prove as ``all bark, no bite,’’ the deepening emotional rift clearly isn’t helping Korean and Japanese firms operating cross-shore businesses. Major Japanese firms in industries like cars, consumer electronics, retail and food are rolling back marketing efforts in Korea as if they’re trying to lay low amid spreading anti-Japanese sentiment.

Of course, dissent often becomes a two-way street. Korean retailers, food makers and tourism companies are also concerned over declining revenue from Japanese customers. Korean entertainment companies, which have enjoyed skyrocketing popularity for their music, films and television shows in Japan over the past few years, are worried about the public there developing an uneasiness over Korean cultural products.

SK-Hana Card, one of Korea’s biggest credit card issuers, had prepared an affiliated service with Japanese credit card giant, Sumitomo Mitsui, and planned to unveil the new card in a lavish press event later this month. The news conference has been postponed indefinitely.

Japanese satellite channel BS Nippon was planning to air Korean drama, ``A Man Called God,’’ starring popular actor Song Il-gook, next week. However, the network rescheduled after Song joined dozens of other swimmers in a relay swimming event to Dokdo in protest of the Japanese claims over the island.

``The decline in the Japanese consumption of Korean cultural products could have huge ramifications as they have been pulling up the consumption of Korea’s industrial items as well,’’ said Kim Yoon-ji, an economist at the Export-Import Bank of Korea.

According to Kim’s analysis, every $100 lost from cultural exports to Japan results in a $412 decline in the sales of other consumer good, such as clothes, electronic gadgets and food.

The hit to tourism could be significant as well. More than 3.29 million Japanese travelers visited Korea last year and spent an average of $234 per day, compared to $124 by American tourists and $133 by French people, according to Korean government data. The tourism industry provided more than 5 percent of Korea’s gross domestic product (GDP) last year.

Korea and Japan reached an agreement last October to expand the size of their bilateral currency swap from around $13 billion to $70 billion to guard against the possibility of the eurozone debt crisis blowing up and rattling financial stability here. The deal for the extra $57 billion expires this October. Even if Japan chooses not to extend the currency swap, the affect on Korean financial markets wouldn’t be significant, according to an official from Korea’s Strategy and Finance Ministry.

``The currency swap was signed for emergency situations, so it won’t affect money markets in normal times like these. We also have a heavy war chest, with our central bank reserves exceeding $314 billion.’’