Gsomia’s end is a cause for concern in many markets

The Blue House’s decision to terminate the military intelligence-sharing pact with Japan has generated considerable concern.

This concern was almost immediately reflected in stock prices.

At the opening bell, the Kospi lost more than 10 points as retail investors started offloading shares. The fall was cushioned by demand from institutional investors.

The benchmark index closed 2.71 points, or 0.14 percent, lower than Thursday’s close at 1,948.30. The tech-heavy Kosdaq market ended 3.27 points, or 0.53 percent lower, at 608.98 on Friday.

Industry insiders said Korea’s decision to end the General Security of Military Information Agreement (Gsomia) could affect Korea’s semiconductor industry and foreign investment.

“I had hoped that things would improve following [President Moon Jae-in’s] Liberation Day speech and Japan’s recent approval to export a second batch of photoresists to Korea, but the Blue House announcement revealed the lack of trust between the two countries,” an industry source told the JoongAng Ilbo in anonymity.

“From a third-party country perspective, this situation is a variable beyond Korea-Japan relations that needs to be considered before deciding to invest or form an economic exchange with Korea. Regardless of the import and export issue with Japan, I’m afraid the Korea discount could be magnified due to this situation.”

The pullout from the joint security pact comes ahead of Japan’s removal of Korea from its so-called white list, which is expected to happen on Aug. 28. The removal from the list could further affect Korea’s manufacturing industries.

A spokesperson from a conglomerate told the JoongAng Ilbo that the Blue House decision is “shocking.”

“Industry insiders believe [the technological gap] is still wide between Korea and Japan, but no one is admitting it,” the conglomerate official said. “The impact [of Gsomia] in politics, diplomacy and national defense could be limited, but business will take the burden.”

The worst case in the aftermath of Gsomia termination is the two countries exchanging repeated countermeasures.

Shinhan Investment projected that if the already bad relationship between the two countries worsens, the Kospi could drop to as low as 1,850.

“Extreme market volatility will be inevitable, depending on the level of Japan’s response,” wrote Kwak Hyun-soo, a Shinhan Investment analyst in a report released Friday. “There’s already speculation that Japan in response could use tools like expanding the export items that are restricted, imposing retaliatory tariffs and freezing Korean company assets.”

Some analysts say the current situation could have a positive effect on the Korean semiconductor industry.

“Japan’s export curbs could drive up chips price and have a positive impact on prices,” wrote Kim Dong-won, a KB Securities analyst, in a report released Friday.

“It can also function as an opportunity for Samsung Electronics and SK Hynix to reduce DRAM stocks.”

The analyst added that local production of key material necessary for manufacturing batteries and secondary cells, which are supplied by Japan, could start as early as next year.

Local production of the equipment necessary to manufacture semiconductors and displays, like thermal evaporators and semiconductor transport equipment, is also likely to be accelerated, according to the report.

BY JIN MIN-JI [jin.minji@joongang.co.kr]