By Joyce Lee and Ju-min Park
SEOUL (Reuters) - South Korea has warned the United States of the potential damage from "undesirable" Japanese restrictions on exports of high-tech material to South Korea, as a trade row between the East Asian U.S. allies intensifies.
As South Korea sought U.S. help in the dispute, triggered by disagreement over the issue of compensation for South Koreans forced to work for Japanese firms during World War Two, it also took steps to limit the damage to its companies.
South Korea's ruling party announced that up to 300 billion won ($255 million) would be included in a supplementary budget to cope with Japan's curbs on exports of three materials, crucial for advanced consumer electronics, by speeding localization of their supply.
The ruling Democratic Party said about one-third of the proposed budget would be for supporting South Korean materials and equipment makers to help them get their products to market.
The East Asian neighbors share a bitter history dating to Japan's colonization of the Korean peninsula from 1910 to 1945.
Relations took a turn for the worse this week when Japan said it would tighten curbs on exports of the materials used to make chips and display panels because trust with South Korea had been broken over the forced labor dispute.
S&P Global Rating's Asia-Pacific chief economist Shaun Roache said the dispute was as unpredictable as the U.S.-China trade war and was likely to affect South Korea's growth.
The Japanese restrictions will affect companies such as Samsung Electronics Co Ltd <005930.KS> and SK Hynix Inc <000660.KS>, which supply chips to companies such as Apple Inc <AAPL.O>.
U.S.-SOUTH KOREAN CALL
South Korean Foreign Minister Kang Kyung-wha told U.S. Secretary of State Mike Pompeo in a phone call late on Wednesday that Japan's restrictions may not only damage South Korean companies, but could also disrupt the global supply chain and hurt U.S. firms.
Kang "expressed concern that this is undesirable in terms of friendly relations between South Korea and Japan and trilateral cooperation among South Korea, the U.S. and Japan," Kang's ministry said in a statement.
South Korea hoped Japan would withdraw the curbs and that the situation would not deteriorate further, it said.
Pompeo said he understood and they both agreed to strengthen communication between the three sides, it said.
The State Department said the two reaffirmed their commitment to the final, fully verified denuclearisation of North Korea and the importance of trilateral cooperation between the United States, Japan and South Korea.
It said the U.S.-South Korean alliance "remains the linchpin of peace and security on the Korean Peninsula and in the region."
State Department spokeswoman Morgan Ortagus said Washington's ties with Japan and South Korea were some of the closest it had in the world and it would do everything it could to strengthen the relationships "between and amongst all three countries."
However, analysts say that while Washington is unhappy with the South Korea-Japan dispute, which also saw the countries clash at the World Trade Organization (WTO) this week, it is unlikely to become a mediator.
Kim Hyun-chong, deputy chief of South Korea's National Security Office, arrived in Washington on Wednesday and told reporters he would meet officials from the White House and Congress to discuss issues that included Japan's export curbs.
'NO NEED FOR U.S. MEDIATION'
A former Japanese ambassador to the United States, Ichiro Fujisaki, questioned the need for U.S. mediation.
"I don't think we need the United States to mediate, just like Japan would not mediate U.S.-Mexico ties or U.S.-Canada relations," Fujisaki told Reuters on Wednesday.
"This is an issue to be solved between Japan and South Korea."
Japan's export restrictions follow its frustration over what it sees as South Korea's failure to act in response to a ruling by one of its courts last October ordering Japan's Nippon Steel Corp <5401.T> to compensate former forced laborers.
Japan says the issue of forced labor was fully settled in 1965 when the neighbors restored diplomatic relations.
New U.S. Assistant Secretary of State for East Asian and Pacific Affairs David Stilwell arrived in Japan on Thursday on the first stop of a 10-day visit to Asia.
He is also scheduled to visit South Korea next week, but he did not mention the dispute when he spoke to reporters.
Sheila Smith, senior fellow for Japan studies at the Council on Foreign Relations, said it may be too early for Stilwell to assess what the United States could do to help.
"He is likely to begin with what I would call deep listening," she said.
Shares in major South Korean chip companies rose for a third day on Thursday on expectations that the Japanese export curbs may ease a supply glut of South Korean memory chips.
Samsung Electronics shares ended 1.4% higher and SK Hynix was up 3.6%, outperforming the broader market's <.KS11> 1.1% rise.
(Reporting by Joyce Lee and Ju-min Park; Additional reporting by Yena Park and Joori Roh in SEOUL; Kiyoshi Takenaka in TOKYO; and David Brunnstrom in WASHINGTON; Editing by Paul Tait, Robert Birsel and James Dalgleish)