[Future Vision Series for Korea-Japan Cooperation] VIII. Korea-Japan Relations in the 21st Century: Focusing on Economic Cooperation

I. Introduction

To improve Korea-Japan relations, it is first necessary to accurately understand the causes of the deterioration in relations. The causes for the worsening of Korea-Japan relations often cited include historical issues such as comfort women and forced laborers, issues concerning the ownership of Dokdo, and the problems of politicians who utilized these issues for domestic political gain. In other words, most arguments claim that Korea-Japan relations have worsened because politicians exploited historical or territorial issues, which are sources of conflict, for their own political benefit. However, this argument only partially addresses the reasons for the deterioration of Korea-Japan relations. If the worsening of Korea-Japan relations were to impose a net cost rather than a net benefit on politicians, they would have no incentive to exploit historical or territorial issues. Particularly, if economic relations between Korea and Japan were close, disputes between the two countries could negatively impact the economy, leading to a decline in public support for political leaders. Therefore, structural factors behind the deterioration of Korea-Japan relations may exist independently of the commonly discussed issues of history, territory, and politicians.

This paper identifies the weakening of economic ties as a structural cause for the deterioration of Korea-Japan relations. It then proposes strengthening economic cooperation as a method to improve these relations. The structure of this paper is as follows. First, it examines the trend in Korean perceptions of Japan. Through this, it explains the relationship between changes in Korea-Japan relations and Korean perceptions of Japan, and then assesses the current position of Korea-Japan relations. Subsequently, it analyzes the economic factors as reasons for the worsening of Korea-Japan relations. This includes pointing out that not only has the economic gap between Korea and Japan narrowed, but also that economic networks, i.e., supply chains, have relatively weakened. Based on this analysis, this paper presents economic measures for the development of Korea-Japan relations.

II. Trends in Korean Perceptions of Japan

The Institute for Peace and Unification Studies at Seoul National University has been surveying Korean perceptions of neighboring countries since 2007 through its Unification Consciousness Survey. The survey is conducted by commissioning Korea Gallup Research Institute and utilizes a structured questionnaire with one-on-one in-depth interviews. The survey includes the following questions: "Which of the following countries do you feel closest to?" "Which of the following countries do you consider the most threatening to peace on the Korean Peninsula?" And for specific countries, it asks: "What kind of country do you consider the following country to be to us?" Respondents are asked to choose one of four options: "Cooperative partner, Competitor, Object of vigilance, Enemy."

Figure 1 shows the trend in Korean responses to the question "Which of the following countries do you feel closest to?" As of 2021, 77.6% of respondents feel closest to the United States. Following this, 13.4% and 4.4% feel closest to North Korea and Japan, respectively, while the proportion feeling closest to China and Russia is 4.0% and 0.6%. In 2007, 11.6% of respondents felt closest to Japan, placing Japan third in relative ranking after the United States (53.3%) and North Korea (16.0%). However, from 2013 onwards, the proportion of respondents who felt closest to China surpassed that for Japan, making Japan fourth. Subsequently, Japan and China only switched rankings at low levels of favorability, and in 2021, Japan once again ranked third. However, comparing 2007 and 2021, favorability towards Japan significantly declined from 11.6% to 4.4%.[1]

[Figure 1] Trend of Favorability by Country (2007-2021)

Source: Kim Bum-soo et al. 2022

Next, Figure 2 shows the trend in perceptions of the country most threatening to peace on the Korean Peninsula during the period 2007-2021. The most significant feature is that in 2021, Koreans perceive China as the country most threatening to peace on the Korean Peninsula. Unfavorable views towards China began to rise from 2017, and in 2018 and 2019, Koreans perceived China as the most threatening country. In contrast, the proportion of respondents who perceive Japan as the most threatening country to peace on the Korean Peninsula has more than halved, from 25.8% in 2007 to 11.3% in 2021. In 2019, when Japan's export restrictions were implemented, this proportion surged to 28.3%, not showing a significant difference from China (34.3%) and North Korea (30.8%). However, it sharply declined to 18.3% the following year, 2020, showing a significant gap with China (32.4%) and North Korea (40.8%).

[Figure 2] Most Threatening Country to Peace on the Korean Peninsula (2007-2021)

Source: Kim Bum-soo et al. 2022

Net favorability by country can be calculated by subtracting the figures in [Figure 2] from the figures in [Figure 1]. In 2021, the net favorability by country was 73.7% for the United States, -0.3% for Russia, -6.9% for Japan, -24.5% for North Korea, and -42% for China. If we categorize these into favorable countries, irrelevant countries, and unfavorable countries, the United States can be classified as a favorable country, Russia and Japan as irrelevant countries, and North Korea and China as unfavorable countries. In other words, the average Korean does not perceive Japan as very favorable, but also does not perceive it as a country that undermines peace on the Korean Peninsula. In short, they consider the relationship with Korea to be distant. The reason Russia is grouped with Japan as an irrelevant country is likely similar.[2]

The above interpretation is similar to the survey results regarding which category each country falls into: cooperative partner, competitor, object of vigilance, or enemy. According to [Table 1], as of 2021, there is a strong tendency to view the United States as a cooperative partner and China and Russia as objects of vigilance. For Japan, the proportion perceiving it as a competitor is the highest at 45.7%, followed by 30.2% perceiving it as an object of vigilance. Notably, unlike other countries, there has been no significant change in the proportions for Japan between 2007 and 2021. This suggests that Korea-Japan relations are trapped in a kind of structural limitation, beyond the diplomatic conflicts stemming from historical issues. In contrast, the United States shows significant changes in perception, with a large decrease in the proportion of respondents viewing it as an object of vigilance or competitor compared to 2007, and a significant increase in the proportion viewing it as a cooperative partner.

[Table 1]Perception of Cooperative Partner, Competitor, Object of Vigilance, and Enemy by Country

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Source: Kim Beom-soo et al. 2022; 2021 Unification Consciousness Survey

[Figure 3] plots downside risk on the X-axis and net favorability on the Y-axis, showing the positions of various countries in 2007 and 2021. Downside risk is calculated by multiplying the proportion of respondents who identified a country as an adversary, a country to be wary of, a competitor, or a cooperative partner by 2, 1, -1, and -2, respectively. Net favorability is the proportion of respondents who felt closest to a particular country minus the proportion who identified that country as a threat to peace on the Korean Peninsula. According to [Figure 3], the United States is a country with high net favorability and low downside risk. Compared to 2007, downside risk significantly decreased while net favorability significantly increased in 2021. In contrast, China's net favorability in 2021 significantly declined compared to 2007, and its downside risk significantly increased. Meanwhile, Japan and Russia showed no significant changes in net favorability and downside risk during the same period. This suggests that the hypothesis that historical issues being politically amplified is the primary reason for the deterioration of Korea-Japan relations has certain limitations. That is, while this hypothesis can explain the year-to-year fluctuations from 2007 to 2021, it is difficult to explain why there has been no significant change in Koreans' perception of Japan over these 14 years.

[Figure 3] Changes in Koreans' Perceptions of the United States, Japan, China, and Russia

Source: Prepared by the author based on data from the Unification Consciousness Survey by the Seoul National University Institute for Peace and Unification Studies.

Notes: 1. Net favorability is calculated by subtracting the proportion of respondents who identified a country as a threat to peace on the Korean Peninsula from the proportion who felt closest to that country.

2. Downside risk is calculated by multiplying the proportion of respondents who identified a country as an adversary, a country to be wary of, a competitor, or a cooperative partner by 2, 1, -1, and -2, respectively.

III. Economic Reasons for the Deterioration of Korea-Japan Relations

Based on the analysis above, Koreans do not perceive Japan as a threat to peace on the Korean Peninsula, nor do they perceive it as friendly. Furthermore, rather than viewing Japan as a cooperative partner or an adversary, Koreans perceive it as an intermediate between a competitor and a country to be wary of. Notably, unlike China, which is perceived as a country to be wary of, Japan is perceived more as a competitor than a country to be wary of. A competitor is a target to be overcome, whereas one must act cautiously and prudently towards a country to be wary of. In other words, Korea-Japan relations are perceived overall as a non-aligned country with neither significant upside potential nor downside risk. Within this context, historical issues and political forces that exploit them lead to the deterioration of Korea-Japan relations. Specifically, certain political forces in both South Korea and Japan exploit historical and territorial issues politically, based on the public's perception that there is not much to gain or lose from Japan and South Korea, respectively. For these reasons, Korea-Japan relations can become a highly utilized topic in domestic politics.

The economic reasons for the weakening of Korea-Japan relations can be categorized into three points. First, the per capita income gap between South Korea and Japan has narrowed. In 2007, South Korea's per capita income was $24,000, reaching 69% of Japan's $35,000. This rapid catch-up is remarkable compared to 1995, when South Korea's per capita income was only 29% of Japan's. Moreover, Japan's current account per capita income stagnated until 2020, while South Korea's income increased from $12,500 in 1995 to $24,000 in 2007, and further to $35,000 in 2022. In 2022, South Korea's per capita income was only $5,000 less than Japan's for the same year. Consequently, Koreans perceive that deep ties with Japan are no longer necessary for economic development. Instead, given that South Korea holds a competitive edge over Japan in certain sectors such as electronics and memory semiconductors, it is likely judged that the economic costs of deteriorating Korea-Japan relations would not be substantial.

Second, the supply chain linkage between South Korea and Japan within the global supply chain is weakening. The materials, components, and equipment industries have traditionally had closely interconnected supply chains between South Korea and Japan. [Table 2] illustrates the production and trade spillover effects in the materials, components, and equipment industries among South Korea, China, and Japan. According to this table, in 2000, South Korea's spillover effect on Japan was more than double that on China, but it decreased thereafter, falling to less than half of the spillover effect on China by 2018. Meanwhile, Japan's spillover effect on South Korea increased from 0.007 in 2000 to 0.019 in 2010, but it remained about half of Japan's spillover effect on China in 2018. In contrast, China's spillover effect on South Korea was approximately half of Japan's at 0.017 in 2000, but it exceeded Japan's at 0.042 in 2010, and significantly surpassed China's spillover effect on Japan (0.049) in 2018 with 0.062. This indicates that since 2010, production and trade between South Korea and China have become closer, while South Korea's spillover effect on Japan has weakened, both in absolute terms and relative to China. As a result, in 2018, both South Korea and Japan had larger spillover effects on China than on Japan and China, respectively, and China's spillover effect on South Korea surpassed Japan's spillover effect on China.

[Table 2] Mutual Spillover Effects in the Materials, Components, and Equipment Industries among South Korea, China, and Japan

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Source: Jeong Hyung-gon et al. 2021

Third, related to the cause in the second point, is the absence of FTAs between Korea and Japan, or in which both were simultaneously members, prior to the conclusion of the Regional Comprehensive Economic Partnership (RCEP). RCEP is a free trade agreement involving 15 countries, including the ASEAN member states, South Korea, China, Japan, Australia, and New Zealand. South Korea's ratification of RCEP was announced on February 1, 2022. In contrast, negotiations for the Korea-China FTA began in 2012 and were concluded in November 2015. This institutional foundation is presumed to have contributed to the closer integration of the Korea-China supply chains. That is, prior to the conclusion of RCEP, while South Korea's global value chain connectivity increased through free trade area agreements with other countries, its network with Japan was relatively weakened due to the lack of a free trade area agreement.

While the convergence of per capita income between South Korea and Japan is an issue that cannot be resolved through policy, the relative weakening of supply chain connectivity between the two countries and the absence of a free trade area agreement reveal policy deficiencies. Consequently, Korea-Japan relations have fallen into a stagnant state with low potential for growth and low downside risk.

IV. Economic Measures for Improving Korea-Japan Relations

Economic measures to improve Korea-Japan relations should aim to increase the potential for growth in bilateral relations. To this end, enhancing economic connectivity between South Korea and Japan is necessary. Possible measures include joint participation by both countries in the U.S.-led Indo-Pacific Economic Framework (IPEF), or South Korea's accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), in addition to RCEP. Furthermore, the proposed Korea-U.S.-Japan Trade and Technology Council (TTC) warrants active consideration. However, such measures require considerable time to be effectively concluded and yield results, and thus are unlikely to contribute to improving Korea-Japan relations in the short term. Therefore, this section proposes concrete and visible economic cooperation measures that can be implemented more rapidly.

1. Joint Utilization of Korea-Japan ODA for Building Digital Infrastructure in Asia

One area where economic cooperation between South Korea and Japan can generate synergy is in international development cooperation, including Official Development Assistance (ODA). As of 2021, South Korea provided approximately $3.1 billion in ODA to 125 countries. Six of the top 10 recipient countries were Asian nations, including Bangladesh, the Philippines, Cambodia, and Vietnam. Key South Korean institutions involved in ODA execution include the Export-Import Bank of Korea ($1.1 billion) and the Korea International Cooperation Agency (KOICA) ($0.64 billion). South Korea's current ODA volume is below 0.2% of its Gross National Income (GNI), but there are plans to increase it to 0.3% by 2030.

Japan's total ODA volume was approximately $11.7 billion in 2019, reaching 0.22% of its GNI. According to the Ministry of Foreign Affairs of Japan's White Paper, the primary objective of ODA is cooperation aimed at achieving “quality growth.” Specific areas include the development of industrial infrastructure, industries, and economic policies; efforts to address debt issues; and the promotion of information and communication technology (ICT), science, technology, and innovation, as well as research and development. This also encompasses remote medical support utilizing ICT and programs for mitigating the impact of natural disasters.

South Korea and Japan are leading democratic and technologically advanced nations in Asia. Both countries can contribute to the consolidation of democracy in Asia by leveraging their industries and technologies. More specifically, they can protect the democracy of recipient countries by preventing telecommunications technology or big data from being used by other authoritarian states or their own authoritarian governments. Korea and Japan can jointly engage in Official Development Assistance and development finance activities for industries and companies directly or indirectly related to this. This can not only contribute to both the economic development and democratic consolidation of recipient countries but also effectively block authoritarian states from disrupting democracy in Asian countries. For example, a South Korean company could invest in 5G communication equipment, and Japanese and South Korean companies could jointly invest in network operations, mobile services, sensors, and the Internet of Things (IoT) as a package for mobile communication networks. Such digital infrastructure, as a foundation for the development of new industries like autonomous vehicles, digital healthcare, and smart factories, can contribute not only to the economic development of recipient countries but also to strengthening the networks between Korea and Japan, and between Korea, Japan, and other Asian economies.

The Japan Bank for International Cooperation (JBIC) is a primary institution for implementing Japan's ODA. JBIC supports development through export-import loans, overseas investment loans, equity investments, and guarantees. As of March 2019, half of its total loans and investments were concentrated in Asia. South Korea's Export-Import Bank also supports the economic development of developing countries through its concessional policy fund, the Economic Development Cooperation Fund (EDCF). If JBIC and the Export-Import Bank of Korea were to jointly support developing countries in Asia, synergy could be expected in terms of financial scale and technological expertise. As such international economic cooperation between Korea and Japan in developing Asian countries accumulates, a Korea-U.S.-Japan consultative body for external economic cooperation and support could be established and operated. This could complement the aforementioned Korea-U.S.-Japan Trade and Technology Council, or the scope of the Korea-U.S.-Japan Trade and Technology Council could be expanded to form a Korea-U.S.-Japan Trade, Technology, Investment, and External Cooperation Council.

2. Economic Cooperation for Low Birthrate and Aging Society

As a developed country that first experienced low birthrates and aging populations, Japan's response strategies can offer valuable lessons for South Korea and other nations. South Korea, with one of the world's lowest birth rates, is experiencing a much faster increase in its elderly population compared to European countries or the United States. South Korea and Japan can not only mitigate the economic and social challenges of an aging society but also create new industrial and business opportunities through corporate activities and technological development, which can then be exported to countries experiencing aging later than Korea and Japan. Furthermore, they can present policies for adapting to an aging society to the international community. An example of such a policy is expanding the labor force by extending the retirement age in line with the trend of improving health status among societal members. Additionally, Korea and Japan can jointly develop a menu of policies for adapting to aging, such as modifying healthcare services and pension systems to account for an aging population.

Aging societies can create new business opportunities. A survey of German companies operating in Japan indicated that product categories with increasing demand due to aging include medical devices, healthcare products, food and beverages, services, household goods, fashion and apparel, robots and machinery, and automobiles (Deutsche Industrie- und Handelskammer in Japan 2010). Beyond new products for the elderly, adapting existing products to be elderly-friendly also presents new business opportunities. Examples include mobile phones, computers, and televisions with easier operation and enhanced voice recognition.

As a first step in economic cooperation for an aging society, South Korea and Japan can launch a forum on technologies and businesses for aging societies. This forum, involving business leaders and experts, would analyze aging societies and discuss business opportunities and technological developments in response. If this forum progresses, a 1.5-track consultative body involving the governments of Korea and Japan could be initiated to discuss and develop government policies related to aging. Furthermore, an international organization could be proposed, initiated by South Korea and Japan, to assist individual countries and the international community in effectively responding to aging societies.

3. Korea-U.S.-Japan Cooperation Body for North Korean Economic Development

If North Korea denuclearizes and integrates into the international economic order, it would not only promote peace in East Asia but also present significant opportunities for the economies of South Korea and Japan. The logistics network in East Asia would be efficiently reorganized, and foreign investment flowing into North Korea, as well as trade with North Korea, would increase. Additionally, the elimination of the security threat posed by North Korea's nuclear program would yield ancillary benefits. For instance, existing defense expenditures could be redirected to more productive uses.

Establishing a Korea-U.S.-Japan cooperation body for North Korea's integration into the international economic order could also positively contribute to North Korea's denuclearization. This is because it would demonstrate that South Korea, the United States, and Japan are willing to provide North Korea with concrete plans and financial resources for economic reconstruction in exchange for abandoning its nuclear program. Furthermore, cooperation between South Korea and Japan on North Korea's denuclearization and economic development could foster a more favorable perception of Japan among South Koreans and enhance their understanding of the potential value of Korea-Japan cooperation. This cooperation body could begin with a two-track approach and transition to a 1.5-track approach at an opportune moment, or it could be expanded into an international cooperation body involving China, depending on the shifts in U.S.-China relations.

The Korea-U.S.-Japan cooperation body for North Korean economic development could develop strategies, roadmaps, and scenarios for North Korea's economic development and formulate action plans executable in accordance with the stages of denuclearization. Specific and appropriate support for North Korea and plans for its economic development can contribute to denuclearization by demonstrating in advance the benefits North Korea could gain from abandoning its nuclear program. When North Korea denuclearizes, sanctions relief or lifting, a peace regime, and North Korean economic development should be offered as a package. In this context, the economic development plan becomes a crucial component of the package to be provided to North Korea, corresponding to the stages of denuclearization.

V. Conclusion

This paper identifies the weakening of economic ties as a cause for the deterioration of Korea-Japan relations. More specifically, as economic ties weakened, the South Korean public began to underestimate the necessity of cooperation with Japan. This led to the perception that there was little to lose by not responding cautiously, given the low downside risk. This low potential for growth and low downside risk has provided a backdrop for politicians to exploit historical and territorial issues for political gain.

This paper proposes measures to strengthen economic ties between South Korea and Japan. In the medium to long term, these measures could include joint participation in the Indo-Pacific Economic Framework, South Korea's accession to CPTPP, and the establishment of a Korea-U.S.-Japan Trade and Technology Council. To improve Korea-Japan relations more urgently, this paper suggests the joint utilization of Korea-Japan ODA for building digital infrastructure in Asia, economic cooperation between Korea and Japan for low birthrate and aging societies, and the establishment of a Korea-U.S.-Japan cooperation body for North Korean economic development. These proposals are examples, and numerous other economic cooperation measures between Korea and Japan likely exist. If businesses, civil society, and the government explore and implement a wide range of creative methods, the potential for growth in Korea-Japan relations can be fully realized.■

References

Kim, Beom-soo, Kim, Byung-ro, Kim, Byung-yeon, Kim, Hak-jae, Lee, Sung-woo, Choi, Eun-young, Hwang, Soo-hwan, and Choi, Hyun-jung. 2022. 『2021 Survey on Unification Consciousness』. Seoul National University Institute for Peace and Unification Studies.

Jeong, Hyung-gon, Lee, Hong-bae, Lee, Hyung-geun, and Park, Min-sook. 2021. 『A Study on the GVC Linkage of Material, Component, and Equipment Industries in Korea, China, and Japan』. KIEP Research Report 20-34.

Deutsche Industrie- und Handelskammer in Japan. 2010. Silver Business in Japan: Implications of Demographic Change for Human Resource Management and Marketing. https://demographic-challenge.com/files/downloads/6211018f987444a57eedb418895740ba/silver_japan_english20091203.pdf (Accessed: May 5, 2022).

Ministry of Foreign Affairs of Japan. 2021. “White Paper on Development Cooperation 2019: Japan’s International Cooperation.” March 17. https://www.mofa.go.jp/policy/oda/page24_000074.html (Accessed: May 5, 2022).

[1] Among age groups, the proportion of respondents who felt closest to Japan in the 19-29 age group was 8.4%, double the average of other age groups.

[2] This survey was conducted in 2021 and does not reflect changes in perception due to Russia's invasion of Ukraine.

■ Author: Kim, Byung-yeon_Professor of Economics at Seoul National University. Ph.D. in Economics from the University of Oxford. He has previously served as a professor at the University of Essex in the UK and Sogang University. He has received accolades such as the National Academy of Sciences Award of Korea (2018), Seoul National University Research Award (2018), The Nier Foundation Research Award (2019), The Cheongram Award from the Korean Economic Association (2005), and the T.S. Ashton Prize from the Economic History Society. His representative works include Unveiling the North Korean Economy(Cambridge University Press, 2017).

■ Editor: Park, Han-soo_EAI Research Fellow

Inquiries: 02-2277-1683 (ext. 204) hspark@eai.or.kr