In South Korea-Japan Spat, Things Go From Bad To ‘We’re Canceling The Intelligence-Sharing Pact’

Risk sentiment soured a bit on Thursday when South Korea said it’s preparing to notify Japan of its intention end the countries’ military intelligence-sharing agreement. 

Seoul cited Tokyo’s August 2 decision to remove South Korea from a trusted exports “white list”.

That decision, South Korea says, “significantly changed” the security cooperation environment.

Moon Jae-in called Tokyo “reckless” at the time and promised to hit back. Now, Seoul has.

Deputy National Security Director Kim You-geun intends to file a notice withdrawing from the The General Security of Military Information Agreement, which is a scant three years old. “South Korea judged that maintaining an agreement meant for the exchange of sensitive military information is not fitting for our national interests”, Kim said.

This significantly worsens the already contentious diplomatic row between Seoul and Tokyo. Tensions can now fairly be described as having boiled over.

The age-old conflict over conscripted labor and “comfort women” has spiraled into what some say is the most acute bilateral crisis in decades, threatening to undermine Washington’s efforts to present a united front against North Korea.

It’s also exacerbating the trade situation and threatens to further upend the global technology supply chain.

This comes at a decidedly inopportune time for South Korea, which has struggled mightily in the face of the global trade frictions. Jitters about a turning of the semi cycle have made things worse. The Kospi garnered the dubious distinction of becoming the worst-performing major equity benchmark in the world earlier this month.

Last month, the BOK slashed its economic forecasts in the course of cutting rates, and exports remain in a tailspin. The Korea Customs Service this week said exports during the first 20 days of August fell 13% from a year earlier. That points to a ninth-consecutive monthly decline.

If you’re looking for one chart that sums up the current market zeitgeist, you could well cite the ratio of the Kospi to the Treasury ETF, which is sitting near a post-crisis low.

Japan, meanwhile, is battling a strong yen amid the global economic malaise and faces a rather vexing quandary when it comes to monetary policy. The Topix wiped out its gains for the year earlier this month, and analysts generally see no respite from yen appreciation in the near-term.

It’s not entirely clear what the immediate implications of South Korea canceling the intelligence agreement are, but suffice to say this won’t do much to bolster risk sentiment, as it just underscores the apparent intractability of a dispute the world certainly did not need given the already fraught geopolitical backdrop.


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