The rate cut, the first since June 2016, underscores the need to help the economy deal with a series of headwinds including a trade tussle between the United States and China, and more recently, its own feud with Japan over the latter's export restrictions.
The South Korean government and rival political parties agreed Thursday on bipartisan efforts to tackle Japan's export curbs on tech materials to South Korea, according to the presidential Blue House.
The U.S. and South Korea said Wednesday that the "Alliance 19-2" joint military drill will go ahead in August as planned.
They also reported that several travel sites in South Korea have even opted to remove Japan from their travel packages altogether. The party had a meeting on July 17 and discussed the issue with former Vice Minister of Foreign Affairs and former South Korean Ambassador to Japan Shin Gak-soo, professor Chung In-kyo at the Department of International Trade of Inha University, etc.
It has reached the point where Japanese media outlets are admitting the sharp decrease in visitors from South Korea is becoming a serious cause of concern.
South Korea has denied that.
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"The addition of the Japan-South Korea trade tensions into the mix was perhaps the final straw that tipped the BoK over into calling for a rate cut, against a market consensus of a 15/10 hold/cut", said Howie Lee, an economist at OCBC Bank.
In an earlier survey on Tuesday, 73% of South Koreans said the government's response to Japan's export curbs was appropriate or should be stronger.
The South Korean population, however, has generally supported the Moon administration's willingness to relitigate what they see as unresolved historical disputes dating back to Japan's occupation.
NHK said that once the deadline passes, Japan would continue to push Seoul for proposals to end the dispute while preparing for countermeasures - including considering going to the International Court of Justice.
Japan maintains the right to claim compensation was settled under a bilateral agreement in 1965, when the two countries normalized relations.