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As unrest in Hong Kong escalated over the summer, the Asian business world looked to Singapore: would the territory’s arch-rival stand to benefit? Hong Kong has weathered more than three months of clashes between anti-government protesters and the police spiralling into the city’s biggest crisis in decades. Some have been quick to presume that business would move to Singapore, one of Asia’s other top financial centres, if tensions in Hong Kong escalate further. But to what extent could the city state truly replace Hong Kong? Singapore’s American Chamber of Commerce said on Thursday that 22 per cent of companies with operations in Hong Kong were considering moving capital out of the territory and 5 per cent had plans to do so, according to a survey it conducted last month. Only 1 per cent planned to move business functions, but 23 per cent were considering that option. When asked what the destination of choice would be, more than 90 per cent picked Singapore. Singapore’s authorities have made a point of highlighting that instability in the territory could harm the city state too. And no major Hong Kong institution has yet risked Beijing’s ire by shifting operations to Singapore. But a steady series of more incremental moves are being made. International recruiters say an increasing number of candidates are expressing a preference for Singapore over Hong Kong. Kathryn Weaver, a partner at Lewis Silkin, an employment and immigration-focused law firm, said that candidates had concerns about their physical safety and favoured Singapore for its economic stability and long-term prospects. Everyone has a business continuity plan around a typhoon scenario. Now you have to consider, ‘What if tear gas gets into an office?’ Neal Beatty, Control Risks Protesters are hit by tear gas at a demonstration on July 21 at the end of a march through the city © AP One client of Ms Weaver’s, a technology company, had been set on opening an Asia-Pacific headquarters in Hong Kong, but shifted to Singapore as a result of the political uncertainty. Foreign workers in Singapore require a visa, meaning any large-scale relocation would pose a logistical challenge. Behind the scenes, financial services companies are building such considerations into their business continuity plans, many of which have been reconfigured as a result of the Hong Kong unrest. “Everyone has a business continuity plan around a typhoon scenario. Now you have to consider ‘what if tear gas gets into an office?’”, said Neal Beatty, a partner at risk consultancy Control Risks. Political stability is something Singapore guarantees, given its carefully controlled and quasi-authoritarian political system. The city-state has been ruled by the same party for six decades and has had just three prime ministers. It also remains one of the most business-friendly countries worldwide, historically beating Hong Kong in the World Bank’s ease of doing business rankings. In the 2019 results, Singapore took second place while Hong Kong came fourth. At 17 per cent and 16.5 per cent respectively, Singapore and Hong Kong offer similarly attractive headline corporate tax rates, which are lower than the global average of 24 per cent. Singapore’s efforts to attract multinational corporations include tax breaks for five years — which can be extended — and research and development grants that can cover up to 30 per cent of the cost of projects that involve product, application or process development. A recent big win came when Dyson decided to relocate its headquarters from the UK to Singapore — a catch described by analysts as a “blockbuster”. But for all of Singapore’s attractiveness, Hong Kong’s economic and financial ties to the world’s second-largest economy would be difficult to replicate. If Singapore is seen by business and finance as the gateway to south-east Asia, Hong Kong is the equivalent for mainland China. The territory’s link to the Chinese market lured Chicago Booth School of Business to move the Asia component of its executive MBA programme from Singapore to Hong Kong, in what was seen as a blow to the city state, which had hosted the programme for 13 years. Aided by its closeness to Beijing under the “one country, two systems” framework, Hong Kong has built unique corridors to the once impenetrable Chinese onshore financial markets. International funds can invest directly in China’s domestic stock and bond markets via Hong Kong, which also remains a top hub for the offshore and onshore renminbi. Three-quarters of all offshore renminbi payment flows go through the territory, while about a quarter of all foreign exchange transactions in renminbi are executed in Hong Kong, according to Swift. By comparison, Singapore accounts for just 3.48 per cent and 5.54 per cent of those flows respectively. Another Hong Kong feature which would be hard for Singapore to replicate is deep capital markets. At $665bn, the equity capitalisation of Singapore’s stock market pales alongside Hong Kong’s near $4tn. Singapore has made efforts to change this, such as introducing new rules allowing groups to list with dual-class shares and offering a S$75m (US$55m) grant to help young businesses cover the costs of listing. But despite this it has seen the total number of companies listed on its exchange decline by 28 in the five years to June. Consequently, although Singapore is making incremental gains from Hong Kong’s woes, it still has plenty more work to do before it can fully dominate its business hub rival.

South Korean growth came in below estimates in the third quarter as the country’s major electronics exporters continued to face headwinds from a global economic slowdown and despite a boost from government spending. The country’s central bank said on Thursday it expects GDP growth of 0.4 per cent in the third quarter against the prior three months and 2 per cent versus the same period a year earlier.  The quarterly figure was down from 1 per cent growth in the second quarter but marked an improvement from the first quarter, when the economy saw a 0.4 per cent contraction. Still, Thursday’s result was below consensus estimates from economists polled by Reuters of 0.5 per cent quarter-on-quarter growth and 2.1 per cent year-on-year.  The below-forecast result comes as Seoul tries to boost growth via spending and with the central bank having already brought interest rates down to record lows following ten consecutive months of declines in both exports and private sector facility investment, a key gauge of business spending. The sharp fall in exports this year has been mostly driven by a longer-than-expected downturn for the country's computer chip makers. Analysts expect that the South Korean economy will remain under pressure in the fourth quarter amid ongoing uncertainty from the US-China trade war and an escalating dispute with Tokyo. “This will likely weigh on the outlook for South Korean exports due to their important role in China’s supply chain, with exports to China accounting for about 25 per cent of South Korea’s total exports by value,” said Tay Qi Hang, an analyst at Fitch Solutions.  Mr Tay added that South Korean shipments to China declined by almost 18 per cent in the year to September, mirroring the fall in total exports by nearly 10 per cent, year-on-year, over the same period.

Marrian Zhou, Nikkei Asian Review staff writer OCTOBER 9 2019Print this page Accompanied by security agents in black suits, Malaysian prime minister Mahathir Mohamad walked into the conference room, smiling at everyone. Speaking at the Council on Foreign Relations in New York on September 26, Mr Mahathir shared his feelings on being prime minister again. “I was the only ‘dictator’ that resigned,” Mr Mahathir joked, referring to critics who labelled him a dictator when he first held office from 1981 to 2003. The 94-year-old leader said he had returned to put Malaysia on the right track. Mr Mahathir, in town for the United Nations General Assembly, was invited to speak at the council. The event on the Upper East Side was moderated by Christopher Hill, a former US assistant secretary of state focusing on Asia. The conversation quickly turned to Malaysia’s relationship with China — specifically, the Belt and Road Initiative. Before Mr Mahathir took office in May 2018, he criticised predecessor Najib Razak for selling out to Beijing in order to build costly infrastructure financed by loans under the BRI. But he has warmed to China. “We are forced to, because we just couldn’t afford it. We have to do something about it,” Mr Mahathir said of working with China to build infrastructure in Malaysia. “Our approach is to save our finances,” he said. “We cannot afford to build these very expensive railway lines. Whether we like it or not, we have to go to the Chinese and appeal to them, point out that we are ready to partner and, in the end, I think they will consider that the best way out is to somewhat reduce the cost.” In June 2018, Mr Mahathir suspended the 688km East Coast Rail Link project, along with two planned gas pipelines that also were backed by China. He said the terms were unfavourable to Malaysia. This article is from the Nikkei Asian Review, a global publication with a uniquely Asian perspective on politics, the economy, business and international affairs. Our own correspondents and outside commentators from around the world share their views on Asia, while our Asia300 section provides in-depth coverage of 300 of the biggest and fastest-growing listed companies from 11 economies outside Japan. Subscribe | Group subscriptions Since then, Mr Mahathir has praised the ECRL deal and renegotiated the construction of the rail link, with the price slashed by $5bn from the original $16.4bn plan. The new deal was made possible after the original line was shortened to 640km by avoiding the construction of a tunnel. The two countries agreed to operate the line jointly as part of the deal. China’s ambitious BRI projects have drawn scrutiny from the west. Critics accuse Beijing of creating “debt traps” for partner countries in order to serve Chinese political purposes rather than bolster communities. China has tried to ease such concerns by highlighting the quality and benefits of BRI projects, as well as the element of international co-operation. South-east Asian countries need to work with Beijing, Mr Mahathir said. “We all realise that we have to deal with China jointly, because that gives us more strength,” he said. “We are not really strong enough to tell the Chinese, ‘No, you should not do this kind of thing, it is the international law’, or whatever.” Although Beijing has made territorial claims in the South China Sea, Mr Mahathir said, China’s government is not very aggressive at present as it wants support from south-east Asian countries. The prime minister discussed other issues, including civil servant capacity in Malaysia and affirmative action policy in the country. The nonagenarian leader also gave lifestyle advice at the end of the event. “Not to eat too much. To live, and not to live to eat,” he said. “The brain and the muscle must always be used. So be active and, I think, you may survive to 94.”

US presidential candidate Andrew Yang continues to defy conventional wisdom. Widely considered a long-shot candidate, he has qualified, relatively easily, for the fifth Democratic party debate on November 20, clearing the party requirements for grassroots fundraising and polling. Those thresholds, higher than previous debates, were installed to shake off candidates such as Mr Yang so that voters could focus more on mainstream candidates such as senators Elizabeth Warren and Bernie Saunders and former vice-president Joe Biden. Mr Yang stunned political pundits by raising $10m in the third quarter, a 257 per cent increase from the previous quarter. A September poll in New Hampshire had Mr Yang beating President Donald Trump 54 per cent to 46 per cent. Mr Yang is a son of Taiwanese immigrants and the first prominent east Asian candidate in US presidential elections. But qualifying for all the Democratic presidential debates is not the 44-year-old Asian American entrepreneur’s only surprise. Mr Yang also holds appeal for Silicon Valley techies and Republicans. Members of his “Yang Gang” of enthusiastic supporters gathered at a café in Concord, New Hampshire, one Saturday morning in late September. Mr Yang likes to say he is the candidate to beat Mr Trump because he is laser-focused on the problems that got Mr Trump elected in the first place. And “the opposite of Donald Trump is an Asian man who likes math!” Mr Yang said at the Concord event. Signature attire for Yang supporters is the “MATH” hat — short for “Make America Think Harder”, an apparent parody of Mr Trump’s “Make America Great Again” slogan. Two Republican women at the meeting voiced strong support for Mr Yang and said they planned to register as Democrats to vote for him. “His policy is not Democrat or Republican,” a woman in a MATH hat said. “It’s fiscally conservative and not socialist. Just common sense.” Mr Yang got her first-ever campaign donation, she said. Mr Yang speaks at an event in Concord, New Hampshire © Tomoko Ashizuka The core of Mr Yang’s political message is universal basic income, which he calls the Freedom Dividend. It is a proposal to give every American adult over 18 years of age $1,000 a month, paid for partly by a new value added tax on companies benefiting from automation. This progressive and unconventional policy has attracted a wide range of supporters: ex-fans of leftwing candidate Mr Sanders, college students and even some Republicans. “Yang can heal our divided country,” another woman at the New Hampshire event said. He has “practical solutions” for income inequality, climate change and the political system, she said. New Hampshire, along with Iowa, Nevada and South Carolina, is one of the first states to choose a candidate in the Democratic primaries. Candidates’ performance there will form a crucial step on the path to nomination. This article is from the Nikkei Asian Review, a global publication with a uniquely Asian perspective on politics, the economy, business and international affairs. Our own correspondents and outside commentators from around the world share their views on Asia, while our Asia300 section provides in-depth coverage of 300 of the biggest and fastest-growing listed companies from 11 economies outside Japan. Subscribe | Group subscriptions Jason Son, a 37-year-old Chinese American businessman, drove two hours from Boston with his family to attend Mr Yang’s town-hall-style meeting. “Andrew Yang is a young, successful entrepreneur and has fresh ideas,” said Mr Son. “He may lack foreign policy experience, but nobody is perfect, and he can hire experts.” The Asian American community “as a whole is excited”, he said. “I know many Koreans in New York support him. He is a great role model for our children,” he added, looking at his son and daughter. Mr Yang is especially popular among Asian communities and immigrants, having grown up in a Taiwanese immigrant family. At a Silicon Valley gathering, supporters explained that Mr Yang represents a voice for Asian immigrants and that his policies are welcomed in technology circles. “Yang is not pushing for breaking up the big tech,” said Hira Kayani, 24, a sales representative at a software company. “It’s a duct-tape solution. He is thinking [about] taxing tech companies. I think people here think Yang’s approach to tech companies is more friendly than others.” Mr Yang’s supporters say his policies are welcomed in tech circles © Bloomberg One of the most prominent figures to endorse Mr Yang is Tesla’s chief executive, Elon Musk. He has not only expressed support for the candidate but has said in a tweet that universal basic income is “Obviously needed”. “California has a lot of Asians, especially in Silicon Valley,” said June Fu, a 25-year-old marketing manager at a start-up. “A lot of first-generation Asian immigrants here feel like they didn’t have the platform or spokesperson to express their demand and interest in the past, and Yang is the one who can speak out for them and represent them. “I think some of Yang’s policy is very friendly to immigrants, which is a huge thing for people in the Valley because a lot of programmers here are high-skill-work immigrants,” said Ms Fu. “I think the universal basic income is really attractive, too.” Mr Yang at the 2020 Democratic presidential debate in Houston, Texas, last month © Getty Before Mr Yang embarked on his presidential campaign, he was known for helping entrepreneurs. Born in upstate New York, he studied economics and political science at Brown University and received a law degree from Columbia. After a stint as a corporate lawyer, he worked for a healthcare start-up and became managing director and then chief executive and president at a test preparation company when he was in his 30s. After the company was acquired, Mr Yang founded Venture for America, a non-profit organisation that assists entrepreneurs. He was named a Champion of Change and a Presidential Ambassador for Global Entrepreneurship by then US president Barack Obama. Mr Yang launched his presidential bid in November 2017 and gained national recognition this February following an appearance on a popular podcast with comedian Joe Rogan. Many supporters cite the podcast as the point where they learnt about Mr Yang. He has since grown his base, mainly online. Mr Yang is not free from controversy. His casual comment in the third Democratic debate, “I am Asian, so I know a lot of doctors”, drew criticism for reinforcing the “model minority” stereotype of Asian Americans. When comedian Shane Gillis was fired from the popular TV show Saturday Night Live for past anti-Asian comments, Mr Yang criticised Mr Gillis but said he should not have lost his job. His defence of the comedian generated some backlash. Even with his long odds and paltry speaking time in the debates, Mr Yang expresses confidence in his candidacy. “Clearly, the strength of the Yang Gang is not getting measured in conventional polling,” he said in a podcast on poll analysis website FiveThirtyEight. Many supporters are not considered “registered likely” Democratic primary voters, he argued. Mr Yang is trying to carry his momentum to the first Democratic caucus in Iowa and to the first primary in February, in New Hampshire. “If you look at the campaigns, we are one of perhaps two campaigns that have risen steadily . . . We’re going to grow and grow and grow and peak at the right time, which is February of next year,” he said in the FiveThirtyEight podcast.

Most weekends, the Uniqlo shop in the Hyundai department store just north of Seoul is buzzing with customers looking to pick up some of the Japanese chain’s trendy, low-cost clothing. But on a recent Sunday in July, it was deserted — a result of the growing “Boycott Japan” movement spreading across South Korea. South Koreans have also stopped buying cars, beer, cosmetics and just about anything else bearing the label “Made in Japan”. Some are even cancelling their summer holidays. “We planned to go to Okinawa in August, but we changed our plan to Jeju,” said Ha, a manager of a Seoul-based financial company. “My wife also told me not to go to Uniqlo any more.” Well-organised protests are not uncommon in South Korea, and they tend to pass relatively quickly. But these boycotts — which in South Koreans’ minds are tied with the emotionally-charged issue of wartime labour and a sense that their most successful companies are under attack — may be different. The movement kicked off shortly after the decision by Japanese prime minister Shinzo Abe’s administration on July 4 to tighten controls on exports of three chemicals essential for making semiconductors and flat panel screens used in smartphones and TVs. By choking off supplies of the chemicals — Japan’s market share for two of them stands at more than 90 per cent — the Abe administration was essentially taking aim at the engine that powers South Korea’s high-tech economy. Protesters raise placards reading 'No Abe!' at a rally in Seoul. Japan’s new export controls have prompted waves of protests and boycotting of Japanese-made products by South Koreans © Reuters The move, which took place on the day that campaigning kicked off for Japan’s upper house elections, launched a bitter trade dispute between Japan and South Korea that has worrying implications not just for their domestic economies, but also for a global trading system already roiled by US-China tensions. Financial analysts have warned that the global supply chain for tech equipment also could be disrupted. Samsung Electronics, South Korea’s biggest company, is already feeling the heat, as are major chipmakers such as SK Hynix. “It is one of the worst situations we have ever had,” said a senior Samsung official, who asked not to be named. “Politicians take no responsibility for the mess, even though it has almost killed us.” This article is from the Nikkei Asian Review, a global publication with a uniquely Asian perspective on politics, the economy, business and international affairs. Our own correspondents and outside commentators from around the world share their views on Asia, while our Asia300 section provides in-depth coverage of 300 of the biggest and fastest-growing listed companies from 11 economies outside Japan. Subscribe | Group subscriptions Lee Jae-yong, Samsung’s vice-chairman, visited Japan in July hoping to receive assurances that supplies would continue to flow unabated. But when he returned to Seoul, Samsung sent a letter to local vendors asking them to stockpile three months’ worth of the Japanese chemicals. Meanwhile, South Korean companies are scrambling to find other sources of the materials. Samsung acknowledged the challenges as it reported its financial results on July 31. “We are facing difficulties due to the burden of this new export approval process, and the uncertainties that this new process would bring,” vice-president Lee Myung-jin said during a call to discuss its second-quarter earnings. “The visibility is low.” It is one of the worst situations we have ever had. Politicians take no responsibility for the mess, even though it has almost killed us A senior Samsung official The Abe administration turn up the heat on August 2 by formally stripping Seoul of its “white list” status, meaning Japanese companies will need government approval before exporting sensitive materials to South Korea. White list status, a symbol of mutual trust between governments, has allowed Seoul to join 26 other countries that are exempt from such scrutiny. Most of the machinery and components South Korea uses for its auto and semiconductor production is believed to fall under this category. Washington has sought to ease tensions between Japan and South Korea, two of its biggest allies in Asia. According to a report by Reuters on July 30, a senior US official has urged Tokyo and Seoul to sign a “standstill agreement” that would prevent further escalation of the dispute to allow talks to take place. But Yoshihide Suga, Japan’s chief cabinet secretary, denied the report, saying “there is no such thing”. Tokyo’s heavy-handed approach is widely believed to have been sparked by its concern over a Supreme Court decision in South Korea last October, which awarded four wartime labourers at Japan’s Nippon Steel Won100m (about $85,000) each in reparations. The ruling was seen as a direct challenge to the diplomatic understanding that all such claims were settled “completely and finally” under a 1965 treaty that established diplomatic relations between the two countries. The concern in Japan is that the verdict could open the floodgates for other victims and their relatives, totalling more than 220,000, to file lawsuits against an estimated 300 Japanese companies accused of using forced labour during the colonial era. The potential reparations could swell to $20bn or more. A South Korean court in January approved the expropriation of some of Nippon Steel’s equity holdings in PNR, a joint recycling venture with South Korean steelmaker Posco, to fund payments to the plaintiffs, prompting fears that other Japanese assets could be seized in the future. “The Japanese government won’t just watch South Korea seize Japanese assets,” said Hajime Izumi, a professor of international relations at Tokyo International University, adding that further asset seizures by South Korea would be met by even tougher measures by Japan. “Japan would demand a return of any seized assets, no matter how long it takes, [whether] 100 years or 1,000 years.” A banner urges the boycott of Japanese-made products at a traditional market in the city of Suwon, South Korea, on July 28 © Jean Chung Karl Friedhoff, fellow in public opinion and Asia policy at the Chicago Council on Global Affairs, is concerned that the dispute may drag on, harming both economies. “The only way that this reaches some sort of short-term truce is if the Korean courts decide not to liquidate the seized assets of Japanese companies as reparations for Korean forced labourers, and Japan removes its export curbs,” Mr Friedhoff said. “But that liquidation is going to take place, and when it does the genie will be well and truly out of the bottle. Japan will retaliate and both sides will then settle in for an extended battle which will make them both losers.” ‘Weaponising trade’ South Korea has taken the dispute to the World Trade Organization, where its representatives argued that the curbs constitute unfair retaliation for the court rulings. This, they say, runs counter to the principle of free and fair trade. “South Korea is the top exporter of semiconductors. Japan’s measures will harm third countries,” warned Kim Seung-ho, deputy minister for multilateral and legal affairs at South Korea’s ministry of trade, industry and energy. But Japan claims that its move was unrelated to the wartime labour issue and was made on national security grounds, though it has offered little specific information publicly to back up this claim. Japan’s use of national security grounds to justify the export controls has worried some trade experts. Governments have historically been reluctant to cite national security in trade cases, but US president Donald Trump has made something of a habit of it — opening the door for others to follow. In 2018, the Trump administration cited national security when it slapped tariffs on steel and aluminium imports from US allies Japan, Canada, Mexico and the European Union. More recently, his administration used the same label to describe cars from Europe and Japan, and equipment made by Chinese telecoms company Huawei Technologies. Major chipmakers like SK Hynix and Samsung are already feeling the pressure: Samsung has asked local vendors to stockpile three months’ worth of the Japanese chemicals © Bloomberg While Mr Trump is a protectionist, Mr Abe has wrapped himself in the cause of free trade. He championed the Trans-Pacific Partnership after the US pulled out of the trade agreement, and has sought new rules for promoting cross-border data flows. But his administration’s use of the national security argument may undermine those credentials. “Japan is the latest country to mix trade with politics, following the US and China,” said Peter Kim, global strategist at Mirae Asset Daewoo in Seoul. “Very much like the ‘Entity List’ from the US aimed at China, the measure is a continuing global trend of weaponising trade at the expense of multilateral agreements and transparency.” A Japanese government official says preparations to impose the curbs began early this year, as tensions between Japan and South Korea were escalating over the reparations court ruling. Mr Abe’s office instructed the ministry of foreign affairs, the ministry of economy, trade and industry and other government ministries to propose ways to apply pressure to South Korean president Moon Jae-in. In the end, his office adopted a proposal from the METI to tighten export controls on the three materials — hydrogen fluoride, fluorinated polyimide and photoresist. Japan decided to introduce the new export controls between the G20 summit in Osaka — where Mr Abe praised the virtues of “a free and open economy” — in late June and the upper house election on July 21. The Abe administration calculated that a tough stance on Seoul would be a winning issue with voters. However, the METI has long held concerns about South Korea’s export control on materials used in devices of mass destruction, such as nuclear weapons, missiles and biochemical weapons. “While Japan has a staff of 120 for screening and inquiring, South Korea has only 11 in charge,” said Rui Matsukawa, a member of the Japanese upper house, speaking in a personal capacity to reporters on July 24. In addition, there are other loopholes in South Korea’s export controls, the ruling party lawmaker said. A South Korean government official refuted this, saying the country has 110 officials in three ministries and two state-run institutions who are dealing with approval and examination of strategic materials’ export. Tensions have been mounting for months: Japanese prime minister Shinzo Abe and South Korean president Moon Jae-in failed to hold talks at the G-20 summit in Osaka in June © Reuters Of the three chemicals subjected to Japan’s export restraints, hydrogen fluoride is the most sensitive. Not only is it used to produce semiconductors, but also in the enrichment of uranium and production of the lethal gas sarin. Concerns have grown in Japan about roundabout exports of Japanese-made hydrogen fluoride to North Korea via South Korea, but a METI official denied this speculation. Given the sensitivity around hydrogen fluoride, it is likely that questions about exports to South Korea would have been raised whether the question of wartime labour came to the fore or not, insiders say. ‘Fight and win’ The trade tensions come as both South Korea and Japan are facing slowdowns in their economies. Neither side wants new headwinds, given the challenge of the trade war and the deceleration of the Chinese economy. But it appears they are also determined to teach each other a lesson. Japanese and South Korean delegations gather at the World Trade Organization in Geneva in July. A Japanese government official says preparations to impose the curbs began early this year, as the dispute over reparations worsened © Reuters This is a far cry from the relationship envisaged by the two countries’ business leaders: a pair of US allies forming an integrated market of 180m people that can compete against China. “The 21st century is said to be the Asian century, but which country will be leading the world?” asked Nobuya Takasugi, a counsellor at the Asia-Eurasia Institute who was a business executive in South Korea for 19 years. “Is it OK to allow China to become the leader? Should Japan and South Korea not work together and take leadership?” South Korea provides highly educated, international talent for Japan, which faces a labour force shortage amid an ageing and shrinking population. Samsung symbolises South Korean industrial strength in designing the Galaxy, a smartphone that stands head-to-head against Apple’s iPhone. But it depends on Japan for technology and components to bring such products to market. The tit-for-tat economic reprisals are not benefiting anyone — and may hurt the Japanese suppliers of the three chemicals, who will see increased competition if the Moon administration’s plans to jump-start domestic production are successful. The chemical exports are estimated to be worth about $500m a year, a relatively small market that Tokyo may be willing to sacrifice for Japan Inc. But the business community is not happy. “No industry wants to see its fate depend on a government policy,” said Sota Kato, research director at the Tokyo Foundation for Policy Research and a former senior official at the METI. “The Japanese semiconductor industry doesn’t have its own lobbying organisation because the Japanese government never previously resorted to a trade war; but if it does, then the industry needs a way to protect its interests.” He was referring to an open letter issued by the largest US tech industry groups on July 24, pressuring Tokyo and Seoul for a negotiated solution to the dispute. Japan has economy-wide groups like Japan Business Federation, known as Keidanren, but lacks an industry group that actively lobbies the government. However, some in Japan’s chip equipment industry downplayed the impact of the trade spat. Even if South Korea loses “white country” status, it would simply be on the same footing as China, Taiwan and Singapore, said Ken Sasagawa, vice-president of accounting at Tokyo Electron, a major chipmaking machinery supplier to Samsung Electronics and SK Hynix. “We have been able to deliver a substantial quantity of machines to these countries in a timely and precise fashion,” he told reporters on July 26. The restrictions may be hurting South Korea’s economy already. Bank of Korea governor Lee Ju-yeol cited Japan’s export restrictions as a factor behind the central bank’s decision to cut its growth forecast to 2.2 per cent from an earlier projection of 2.5 per cent. “If export restrictions are realised and expanded, we cannot say that its impact on exports and the economy is small,” Mr Lee said on July 18. “It is not desirable that it expands and worsens. It needs to be resolved.” With South Korea’s general elections approaching next year, some politicians are fanning anti-Japanese sentiment © Jean Chung But South Korea’s politicians are encouraging the anti-Japan sentiment, betting it will help boost their popularity ahead of general elections next year. Cho Kuk, a high-ranking official in the Moon administration, leads the trend. “Japan’s state power is apparently stronger than that of South Korea,” Mr Cho said in a Facebook post. “But let’s not be afraid of this. South Korea’s state power has grown up to the level that cannot be compared to 1965 when the South Korea-Japan treaty was signed.” He said diplomacy was the best option for ending the battle. “But, if we cannot avoid [a] legal and diplomatic battle, we should fight and win,” he said. If we cannot avoid [a] legal and diplomatic battle, we should fight and win Cho Kuk, high-ranking official in the Moon administration The ruling Democratic Party of Korea set up a committee to deal with the matter, titled “The Special Committee on Japan’s Economic Invasion”, criticising Tokyo for using a “suicide bombing” strategy that hurts its own economy. Such rhetoric suggests that politicians in both countries are unlikely to back down any time soon. “I can’t foresee a short-term resolution to this. It’s clear that both sides made miscalculations in letting this get to this point, but are now so invested that backing away is going to be politically damaging,” says Mr Friedhoff.

The global equity strategist at Jefferies finally gave a name on Monday to the Japanese government’s abrupt plan to tighten rules on inward direct investment: xenophobia. Sean Darby’s diagnosis is privately shared by a wide range of people — from the senior executives of global banks to at least one member of Prime Minister Shinzo Abe’s circle. How else to explain a proposed law change that seemingly emerged from nowhere in mid-June is likely to be rammed through Japan’s parliament by early December, and would simultaneously make Japan’s oversight of foreign investment the most draconian among advanced economies, discourage inward investment and undermine five years of market-boosting progress on corporate governance? But it is a diagnosis, say opponents of the move within corporate Japan, the Japanese financial industry and the ruling Liberal Democratic Party, that could run deeper than Mr Darby’s assessment suggests. This is not merely about ringfencing Japanese companies from sensitive technology leakage to China or elsewhere, closing a perceived loophole to placate Washington. It is rather the symptom of an ideological clash within Japan about the appropriate role and powers of foreign investors — a debate that Mr Abe had largely avoided but can apparently no longer suppress. The issue has become so divisive, say officials, that clear rifts are now forming both between and within the various ministries involved. Evidence of this emerged at the end of last week. The Ministry of Finance’s proposed amendment to the Foreign Exchange and Foreign Trade Act would lower the threshold at which foreign investors buying stock in listed companies in a quite broad list of sensitive sectors are obliged to submit a pre-acquisition notification from the current 10 per cent to 1 per cent. Critically too, actions by foreign investors attempting to “influence corporate management” in those companies would also require pre-notification. That would in theory, give the state the power to veto any foreign shareholder activism of which it either disapproved itself or had been lobbied about. Various alarm bells rang as everyone mulled the ambiguities and potential unintended consequences of the plans and, very rapidly, the objections grew. The Tokyo Stock Exchange, for one, sees little merit in rules that risk driving away the foreign investors who own 30 per cent of the market and account for 70 per cent of daily turnover. Last Friday, in what appeared a hasty attempt to calm these fears, the MoF clarified that transactions by foreign securities firms for proprietary reasons (market making, block trades etc) would be exempted from filing pre-notifications. There would also be exemptions for foreign banks, insurance firms and asset managers. Cause for some relief, perhaps, until you read the fine print on where the veto powers are retained. The exemptions for foreign asset managers will apply only where there is “no intention to influence management”. That phrase, as it stands, is in manifest need of refinement. Actions covered by it could include dialogue between asset managers and management over dividends, buybacks or corporate strategy. It could include a holder with a stake of more than 1 per cent voting for a proposal for a change of director submitted by another shareholder. It could even cover the sending of a letter to management with suggestions. All of these have been in the toolkit that has been deployed — with steadily improving results — to push for change in corporate Japan. Any one of these, notes Goldman Sachs strategist Kathy Matsui, falls within the normal activities of long-only institutions, let alone activists. Depending on who gains the upper hand in coming weeks and months, the ambiguities may yet be ironed out and space may ultimately be left for levels of pressure on Japanese managements to remain pretty well as they are now. But according to people close to senior LDP members, those pushing these changes have, to a significant extent, shown their hand: national security concerns make a useful and explicable “tatemae”, or pretext, while the ability to rein foreign influence on Japanese management is the “honne”, or true motive. That need not, however, be an entirely bad thing. For nearly five years since the passing of the governance and stewardship codes, the exercising of shareholder powers by foreign investors has steadily progressed without triggering the kind of explosive public debate it might have in the past. Instead it has simmered behind the scenes, producing this type of unexpected, left-field lawmaking that creates great uncertainty when it finally makes it into the open. An open public debate, of the sort this new law is now provoking, could ultimately be healthy.