Bank of Korea Governor Lee Ju-Yeol said a continuation of the row with Japan would have ‘no small impact’ on the South Korean economy (JUNG YEON-JE)

Seoul (AFP) – South Korea’s central bank on Thursday cut its key interest rate for the first time in three years as the economy struggles with sluggish global growth and with the country is embroiled in a trade spat with Japan.

The Bank of Korea (BOK) lowered its key rate to 1.5 percent from 1.75 percent, citing slowing exports and “increased” volatility in domestic financial markets.

It joins a growing number of central banks worldwide that reduced borrowing costs to shore up their economies in the face of a prolonged trade dispute between the US and China.

At the same time long-standing tensions between South Korea and Japan over the use of forced labour during World War II have bubbled over into a trade row that experts warn could hammer the global tech market.

Japan has restricted exports of three chemicals crucial to South Korea’s tech sector and used by major firms including Samsung Electronics and SK Hynix in the manufacture of microchips and smartphones.

Given the volume of trade between the two neighbours, if the restrictions are sustained or expanded it would have “no small impact on our economy”, BOK chief Lee Ju-yeol told reporters.

“It wouldn’t be ideal for export restrictions to worsen,” he said. “More efforts are needed to resolve the issue to prevent that from happening.”

South Korea and Japan are both US allies, democracies and market economies faced with an overbearing China and nuclear-armed North Korea.

But relations between the two remain heavily affected by Japan’s expansionism in the first half of the 20th century, including its colonisation of the peninsula.

South Korean President Moon Jae-in has said Japan’s actions are politically motivated and have caused an “unprecedented emergency” for South Korea’s export-driven economy.

The row comes with tech companies around the world already under pressure from a weakening global outlook, while the chip sector is particularly threatened by soft demand.

The bank also lowered South Korea’s growth forecast this year to 2.2 percent from its earlier prediction of 2.5 percent.

South Korea’s GDP grew 2.7 percent in 2018, the weakest pace in six years.

Disclaimer: Validity of the above story is for 7 Days from original date of publishing. Source: AFP.