Car manufacturers, clothing firms and electronics makers – including heavyweights Nissan and Olympus – were among the 45 Japanese companies that withdrew from the South Korean market in the financial year ending March last year, with analysts anticipating an increase in this figure amid the impact of Covid-19 and deteriorating relations between Tokyo and Seoul. Camera giant Olympus pulled out of South Korea in June last year, while carmaker Nissan left in December. While they were among the firms citing deteriorating business conditions for the move, experts say what is being left unsaid are concerns South Korean courts could seize the assets of any Japanese firm with links to companies accused of exploiting Korean nationals as labourers during Tokyo’s colonial rule of the peninsula between 1910 and 1945. Japan-South Korea ties remain cold, five years after ‘comfort women’ agreement A court in Daejon last month ruled that the sale of assets seized from Japan’s Mitsubishi Heavy Industries should go ahead to compensate a group of former labourers. Earlier this month, a South Korean court ordered the Japanese government to compensate 12 women forced to work in its wartime brothels. Tokyo maintains the comfort women issue was settled under a 1965 treaty that normalised diplomatic ties, and in a 2015 deal, both sides agreed to “irreversibly” end the dispute. Japanese Prime Minister Yoshihide Suga on Monday told Parliament Japan would urge South Korea to take appropriate steps on bilateral ties, which are in a “severe” state. South Korean President Moon Jae-in on the same day acknowledged that the 2015 deal was an official agreement but said both sides would need to seek solutions for their different historical disputes, so that these issues would not be a barrier to cooperation. Stephen Nagy, an associate professor of international relations at Tokyo’s International Christian University, said while Japan had traditionally been the largest provider of direct foreign investment into South Korea for many years, Japanese companies had been “spooked” by the court cases and the hostility towards Tokyo, most clearly seen in the broad boycott of Japanese brands by the South Korean public. “A lot of Japanese companies are just deciding that Korea is a less desirable and less safe place for them to invest,” he said. “It has also become more difficult for Japanese firms to collaborate with Korean companies since Tokyo took Korea off its ‘white list’ of preferred trading partners in 2019, but we are seeing a broader general deterioration in bilateral relations.” Differences of opinion on the nations’ shared history came to the surface again in 2019 under the administration of South Korea’s President Moon Jae-in , culminating in court rulings for forced-labour compensation against Japanese firms that triggered Tokyo’s decision to withdraw South Korea’s favoured trade partner status. The Daejon ruling has sent a chill through Japanese companies, analysts say, even those that did not exist during colonial rule, as firms identified as having capital from companies operational during that period are concerned they could be held accountable by South Korean courts. Mitsubishi, Toyota, Nissan, Hitachi, NYK Line, Mitsui & Co, and Nippon Steel and Sumitomo Metal have all been targeted in suits brought by former forced labourers, either in the United States or South Korea, over the past two years. According to figures released by the Korea Institute for Industrial Economics and Trade last August, 173 foreign businesses closed their operations in South Korea in 2020, with Japanese firms accounting for the largest number at 45. Thirty-five were from the US and 17 were from Hong Kong. ‘POLITICAL ISSUES’ A spokesperson for Yokohama-based Nissan said the carmaker withdrew from South Korea effective in December due to “changing business conditions”. It posted a 39.7 per cent year-on-year drop in sales in 2019 and a 41.3 per cent year-on-year fall in the first four months of last year, according to reports, with costs outstripping profit by almost US$12 million. The official declined to comment on “political issues”, or the impact of the wide-ranging boycott by South Korean consumers of Japanese brands since last year as ties soured. An official from Olympus also said the company “could not comment on political matters” over its exit from the South Korean market, which saw it close its flagship store in Seoul along with in electronic retailers and its online shop. With most companies wary about further offending a consumer base, Onward Holdings head Michinobu Hogen is one of the few who have come close to identifying the problem. Explainer | Explained: what’s driving Japan’s escalating feud with South Korea? Explaining his company’s decision to shut down 26 golf-wear shops in South Korea and liquidate its local subsidiary, Hogen in November told the Fuji Sankei newspaper: “Due to the friction between Japan and South Korea, business performance has been poor recently.” According to the Korea Customs Service, imports of Japanese consumer goods in the first four months of 2020 fell 37.2 per cent from the same period a year previously to US$250 million. That figure was far larger than the total decline in imports of goods, which fell 9.5 per cent over the same time frame. Imports of Japanese beer were hit particularly hard, plummeting 86 per cent, while imports of Japanese cars were down 58.7 per cent. Food company Ajinomoto saw sales contract more than 34 per cent in South Korea over that period while household goods brand Muji saw a 9.8 per cent fall in sales. Nagy from the International Christian University anticipates that more Japanese companies will opt to pull out of South Korea again this year as they seek “greener pastures, such as in Southeast Asia and other potentially lucrative new markets”. Yoichi Shimada, a professor at Fukui Prefectural University, agreed that Japanese firms are increasingly looking elsewhere to sell their products and services. “Two years ago, I was in a museum in Busan that listed all the Japanese companies that operated in Korea during the colonial period and all their modern-day counterparts,” he said, adding that South Korean President Moon “talks about reconciliation and a ‘forward-looking’ relationship with Japan, but these historical issues are shoved in people’s faces at every turn”. “Japanese companies are looking at what has happened to Mitsubishi and they are deciding they do not want the same thing to happen to them,” Shimada said. “So they are exploring their options.” Comfort women statues: If that’s Abe, it’s ‘unforgivable’, Japan warns South Korea MORE THAN A DIFFERENCE OF OPINIONS Analysts say both Japan and South Korea are likely to dig in their heels, with Tokyo possibly considering retaliatory measures if Seoul forces the sale of assets of Japanese companies or those belonging to the Japanese government in South Korea. There has been speculation that Japan will delay sending a new ambassador to Seoul, implement new sanctions on exports critical to South Korean industry, introduce new visa requirements for South Koreans and, in a worst-case scenario, respond to the seizure of government assets with an identical tit-for-tat move. Japan’s foreign minister Toshimitsu Motegi on Monday said the court ruling – for individual payments of 100 million won (US$90,475) to 12 former comfort women – had caused a “totally unthinkable situation in terms of international law and the bilateral relationship”. But Dr Park Saing-in, an economist at Seoul National University, said while the boycott of Japanese brands initially attracted widespread support, it had begun to wane. “Right now, I do not think that the majority of Koreans are happy that Japanese firms are leaving because there has been so much [foreign direct investment] here, and that has been very good for creating jobs and competition that has benefited Korean consumers by keeping prices lower,” he said. “Clearly the pandemic has played a part in the situation, but Japanese brands were suffering even before that due to the boycott and chose to leave because they were doing so badly.” Japan warns of response if South Korean court seizes Nippon assets for forced labour compensation Yet Park was optimistic that the situation could be reversed quite swiftly, particularly as Japan goes to the polls before the end of this year and South Korea’s elections will be held early next year. “If these new governments can move to reset the relationship, that will serve to help the bilateral business relationship as well,” he said. The problem, however, goes well beyond a difference of opinions between the two neighbours, said Nagy from International Christian University, and threatened to upend any ambitions that incoming US President Joe Biden had of forging a united front with Washington’s two most important security and economic allies in the region. “The trilateral relationship between the three countries is absolutely critical to Biden’s efforts in relation to China, and if Japan-Korea ties are deteriorating, then that poses a serious problem,” he said. “Right now, South Korea appears to be the weakest link in the alliance and the possibility of a break will be a huge headache for the US.”