As the trade war between Japan and South Korea escalates, Korea’s largest public pension fund, the $580 billion National Pension Service (NPS), is coming under increasing pressure to divest from companies connected with Japan’s wartime activities. Other Korean asset owners are looking to the NPS for direction, say local observers.

Meanwhile, Korea Investment Corporation, the country's $130 billion sovereign wealth fund, is facing calls for its investment rules to be revised in view of the ongoing conflict with Japan.

The tense relationship between Korea and Japan dates back over 100 years to when Korea was annexed by the Empire of Japan in 1910. It remained a part of Japan until the end of World War II in 1945.

Tensions over trade arose again this July when Japan imposed export restrictions on South Korea and removed its favoured trading partner status. In retaliation, Korea downgraded trade relations with Japan in mid-September and dropped Japan from its list of preferred partners to receive fast-track approvals.

Japan’s initial move was prompted by the Korean supreme court’s 2018 ruling against Japanese companies over wartime slave labour. Late last year, the Korean supreme court ordered several Japanese companies – including Mitsubishi Heavy Industries, Nachi-Fujikoshi and Nippon Steel – to compensate the families of Koreans illegally forced to support Japan’s World War II efforts with their labour.

Local media in Seoul reported last Tuesday (October 1) that Korean institutional investors are seeking direction from the NPS on how to deal with their own investments in Japanese companies. The pension fund is expected to discuss revisions to its investment guidelines on Japan at its investment committee meeting later this month. NPS has invested at least $823 million in Japanese companies touched by the issue and it has been under growing pressure to cut ties with those firms.

The fund is reviewing its holdings in Japanese companies potentially involved in wartime crimes in Korea and will draft an exclusion list of areas in which it will not invest, NPS chairman Sung-joo Kim, told the Financial Times in August

AsianInvestor reached out to the NPS for comment on this situation but received no response at press time.

POLITICAL PRESSURE

According to the Korea Times, local lawmakers have also proposed a bill to revise the Korea Investment Corporation Act, in order to restrain Korea’s sovereign fund from investing in Japanese firms.

“The sovereign wealth fund should set up its principles for socially responsible investments, not only focusing on return on investments," said Kyung-hyup Kim of Korea’s ruling Democratic Party, one of the lawmakers who proposed the revision.

Another Korean pension fund has already pulled out of a planned investment in Japan. In July, the $31 billion Korean Teachers’ Credit Union (KTCU) cancelled a planned $74 million commitment to a global infrastructure fund run by Japan’s Marubeni Corporation. The decision is widely believed to be directly related to the trade dispute.

A pension fund executive interviewed by local Korean media indicated that some Korean institutions are deferring their decisions on divestment so as to not to fan the flames and make matters more difficult for diplomatic efforts.

Dong-hun Jang, chief investment officer at the $112 billion Public Official’s Benefit Office (Poba), told AsianInvestor the fund is continuing to review its investments but that it “has no change in investment strategy on Japan” at this time.