FULL REPORT: South Korea – Historical resolution will help normalise ties with Japan and expand bilateral cooperation

Torchlight Predictions

• Agreement on wartime forced labour dispute will lead to removal of trade restrictions between both countries in near term
• Trilateral cooperation between Seoul, Tokyo and Washington will likely extend beyond security cooperation to advanced technologies restrictions against Beijing
• President Yoon’s approval ratings will remain low given public’s divided views on historic disputes, prolonging domestic instability in 2023

Developments

• The foreign ministry unveils a plan for resolving the historic dispute with Japan over forced labour issues during the Japanese colonial period from 1910 to 1945. Under the plan, a government-backed foundation will pay compensation to victims of wartime forced labour, while Japanese firms will be expected to donate to a separate fund to promote bilateral cooperation. (6 March) 
• President Yoon Suk-yeol’s office announces that he will visit Japan over 16-17 March and meet with Japanese Prime Minister Fumio Kishida at the latter’s invitation. (9 March)

Insights

Seoul’s landmark resolution on wartime labour disputes aligns with our previous analysis that Yoon will step up efforts to improve relations with Tokyo. Japan had previously insisted that the compensation issue was settled under the 1965 treaty and implemented export controls on critical materials to South Korea in retaliation for a 2018 Supreme Court ruling ordering Japanese firms to compensate victims. The latest resolution therefore represents a pragmatic solution, as it allows Japan to maintain its position and does not impose mandatory compensation on Japanese firms. The two sides will likely reach an agreement in the coming weeks, allowing both to normalise relations and enable greater bilateral engagement in the long term.

Further details of the agreement will be announced after the upcoming summit between Yoon and Kishida. Yoon’s trip to Japan will mark the first reciprocal visit between the leaders of the two nations in 12 years. It is likely that their meeting will focus on removing bilateral trade restrictions and strengthening coordination towards North Korea’s security threats. Meanwhile, it is increasingly likely that Yoon will be invited by Tokyo to attend the G7 summit in Hiroshima this May. As the host, Japan can invite guest nations to the event, and including South Korea will further reinforce their diplomatic ties.

Such a scenario will almost certainly see a trilateral security meeting between Japan, South Korea and the US on the sidelines of the G7 summit. The US will be particularly keen to expand trilateral engagement beyond military coordination amid intensifying competition with China. Indeed, Yoon is expected to visit the US in April and the trip will likely focus on strengthening supply chain resilience and implementing further export controls on advanced technologies to China. That said, Seoul’s increasingly close relationship with Washington and Tokyo will likely prompt criticism from Beijing, raising regional tensions in the coming months.

Implications for Business

Trade: An agreement on the wartime forced labour issues will almost certainly lead to the lifting of Japan’s export controls on raw materials critical for semiconductor manufacturing, as well as other bilateral trade restrictions. This will likely see their trade volume increase gradually in the coming years. South Korean and Japanese technology firms will particularly benefit from a closer bilateral trade relationship, given both countries’ shared interests in developing advanced technologies and strengthening economic security.

Domestic stability: Yoon’s decision to set up a government-backed fund to compensate the victims will help improve trade relations with Tokyo and likely accelerate the country’s wider economic recovery. That said, this is unlikely to have a significant impact on increasing his low popularity, given the South Korean public’s mixed sentiment about the deal. The opposition and some groups representing victims have criticised Yoon’s resolution as it does not require an official apology and compensation from Japanese actors. Yoon’s approval ratings will hence remain low in the near future, suggesting that domestic instability will remain heightened throughout 2023.

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