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.”

The spat is impacting businesses, investors and the outlook for growth in two of Asia’s biggest economies.

Companies concerned

The global tech industry, for example, is watching the dispute closely after Japan tightened export controls for materials vital to Korean makers of computer chips and displays — a move that could upset supply chains for everything from Apple iPhones to Dell laptops.

Samsung Electronics Co., the world’s biggest chipmaker, is trying to diversify its suppliers, but investors are wary: The stock has slumped about 6 percent since the start of July.

For Japanese firms, boycotts by Korean consumers pose a growing threat.

Sales of Japanese cars in South Korea plunged 32 percent in July from the prior month; beer sales from brands like Asahi Group Holdings Ltd. reportedly sank 40 percent; and Fast Retailing Co. said its Uniqlo stores in South Korea are taking a hit. The number of Koreans visiting Japan slumped 7.6 percent in July, an ominous sign for travel agencies and duty-free store operators.

Beneficiaries of the spat include South Korea’s Soulbrain Co., which makes one of the materials impacted by Japan’s tightened export controls.

Shares have surged over 50 percent since early July on expectations the firm will win more orders from Samsung and SK Hynix Inc., another big Korean chipmaker. Shares of Japanese defense issues including Ishikawa Seisakusho Ltd. and Hosoya Pyro-Engineering Co. surged over 10 percent in intraday trading Friday.

Markets turbulent

The spat adds to a long list of headwinds facing South Korea’s stock market, from the U.S.-China trade war to simmering concerns about global economic growth.

The Kospi index has dropped about 8 percent since tensions began escalating in July, one of the biggest drops worldwide, and the won has weakened about 4 percent against the dollar. Japanese markets have held up somewhat better, with the Topix losing about 5 percent. The yen, seen as a haven currency during times of market turbulence, has gained about 2 percent versus the greenback. Some investors see opportunities in the volatility. NH-Amundi Asset Management, which manages about 40 trillion won ($33 billion), has launched a Korean equity fund that invests in local suppliers that may benefit from Japan’s export restrictions.

Economies at risk

The impact on growth has been limited so far, but the potential for disruption is significant.

Japan and South Korea are each other’s third-biggest trading partners, according to Bloomberg data.

The spat won’t have an immediate impact on their sovereign credit ratings, but over time it could weaken their growth potential and that of the world by undermining support for multilateral trading frameworks, S&P Global Ratings said this month.

The Bank of Korea cut interest rates last month and has said it will consider responding with more monetary stimulus to ease the impact of trade tensions. Forecasters surveyed expect its economic growth to slow to just 2 percent this year, the weakest pace since the 2008 global financial crisis. Even that may prove optimistic, given that the stern stance from both sides has fueled public support for both country’s leaders, the conflict is unlikely to end anytime soon.

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