The escalating feud between South Korea and Japan is heightening concerns about the fallout for global supply chains, financial markets and economic growth.

What started as a dispute over colonial-era grievances has snowballed over the past two months, with relations deteriorating to the lowest point in decades Thursday after Seoul withdrew from a key intelligence-sharing pact. The South Korean won weakened on the news, while Japan defense stocks rose.

"This seems to be a signal that the Korea-Japan conflict will continue," said Joonwon Yoon, a fund manager at HDC Asset Management in Seoul. "It only adds more uncertainties to the market."