Japan To Approve First Export Of Semiconductor Materials To S.Korea Since Curbs

In a day when fears about escalating trade and currency wars (and the PBOC's first imminent yuan fixing below 7.00 tonight) and panicking central banks sent global bond yields to near record lows, there was some positive news involving one of the parallel trade wars that has been taking place in the Pacific Rim periphery of the main event between the US and China.

Specifically, the Nikkei reported that the Japanese government is set to approve some exports of semiconductor materials to South Korea, potentially a minor but notable detente in the recent trade feud between the two countries, and the first such approval since Tokyo tightened export controls on the products in July.

The Ministry of Economy, Trade and Industry determined after a review that there is no risk the shipments will be used for military equipment. Despite the additional bureaucratic hoops exporters must now jump through, the resumption of shipments may mean South Korea's semiconductor production will not be severely affected.

According to the Nikkei, the ministry is likely to announce the approvals as soon as Thursday, however, "officials are not expected to give details about the shipments or orders as the information is confidential."

As a reminder, over a month ago, on July 4 Japanese Prime Minister Shinzo Abe decided to require government approval for each shipment of key materials - such as fluorinated polyimide, which is used in smartphone displays, and resists and hydrogen fluoride, used to make semiconductors - to South Korea as part of a sudden reversal in trade policies between the two export-reliant nations. Previously, companies could obtain comprehensive approval that allowed them to export without screenings of individual shipments, for a set period.

The amount of paperwork involved is significant. For resists and fluorinated polyimides, the process involves submitting seven different documents, including technical details about the materials and their specifications.

Hydrogen fluoride is subject to more stringent controls, with nine documents required. The exporter must provide details about the production process at the facility using the gas, going all the way up to finished goods, along with a record of the buyer's past purchases of the material and output of the products for which it will be used. The importer must also sign a pledge that the gas will not be used for military purposes.

The red tape created major headaches for exporters, which had to field inquiries from the government about South Korean manufacturers' production processes or needed to get the signatures of those companies' executives. This bogged down the screening process at the trade ministry as reviews can take up to 90 days, in the process grinding much of the semiconductor trade between the two nations to a halt. "Showa Denko, which reportedly sent in an application for hydrogen fluoride exports in mid-July, is still waiting for approval, according to President Kohei Morikawa" the Nikkei reports.

While Japan also requires approval for individual shipments of these products to China and Taiwan (which typically receive less favorable treatment than South Korea), with those two markets, exporters of resists and fluorinated polyimides can get comprehensive approvals letting them use simplified customs procedures for three years.

It remains to be seen if the move is merely a bureaucratic push or a de-escalation in the ongoing Pacific Rim trade war: last Friday, Japan's cabinet decided to remove South Korea from its list of preferential trade partners, a move that will take effect on Aug. 28. The new rules allow the trade ministry to order screenings of shipments for nearly all products, other than food and lumber, to South Korea. Observers have expressed fears that this could expand the red tape issue to industrial machinery and other goods.