Data leak at SoftBank joint venture sparks blame game between Japan and South Korea

A series of data leaks from a $20bn internet company formed by Japan’s SoftBank Corp and South Korea’s Naver is straining relations between allies and showing how government concerns over digital security can curb tech groups’ international ambitions.

Japan and South Korea have been at loggerheads since Line Yahoo suffered network breaches that were blamed on insecure systems at Seoul-based Naver, its joint owner. 

Officials in Tokyo have used national and economic security grounds to argue that Naver should now cut its 50 per cent stake in A Holdings, the holding company for Line and Yahoo Japan, according to people familiar with the matter. But this would give the other joint owner, SoftBank Corp, the chance to seize control.

“Line needs to consider the influence of its capital structure on its security governance. The purpose of this is solely for the protection of personal data, so we will continue to explain carefully to South Korea,” Takeaki Matsumoto, the communications minister, said in an interview. 

Line Yahoo — a combination of the Line chat app, created in Japan by South Koreans, and SoftBank’s Yahoo Japan internet service, orchestrated by the tech conglomerate’s founder Masayoshi Son — is popular across Asia, where both Japanese and Korean tech companies are looking to expand their services.

“[Son] envisioned creating a global technology platform via Line Yahoo but his vision will naturally clash with what the Japanese government is trying to do from an economic security perspective,” said Kazuto Suzuki, professor and economic security expert at the University of Tokyo. 

“This is a dilemma that will emerge not only in Japan but worldwide when discussing data localisation or regulation of digital platforms,” he added.

Countries are increasingly grappling with questions of national security and data, such as the US’s move to ban short-video app TikTok due to its alleged potential to be used by China to collect foreign intelligence.

“Everyone in these discussions about Line has TikTok in the back of their minds,” said one investor in SoftBank in Tokyo.

“Japan’s economic security law had China in mind, so it’s a bit absurd that it seems to be being used on a friend in South Korea,” the investor added.

Seoul has repeatedly warned against the politicisation of the issue, while also cautioning Japan not to act unilaterally to alter A Holding’s capital structure. Meanwhile, South Korea’s main opposition party said the pressure from Japan amounted to “corporate extortion” and added: “To have Line taken away is to have our economic territory taken away.”

The row spilled over into top-level talks between the two countries’ leaders last month, threatening to overshadow a recent thaw in relations that followed decades of historical and territorial rows. During a meeting in Seoul, Korean President Yoon Suk Yeol and Japanese Prime Minister Fumio Kishida agreed to co-ordinate more closely to prevent the incident from escalating.

Line launched in 2011 as Japan grappled with disruption to communication services caused by a devastating earthquake and tsunami. The messaging app began with mostly Korean staff and engineers, using Naver’s technology for the platform’s initial development. 

In 2019, Line merged with Yahoo Japan to create a broad-based internet group intended to compete with the likes of Facebook and domestic rivals such as Rakuten. The deal involved Naver and SoftBank Corp, the telecom arm of the tech group, each taking 50 per cent of the holding company.

But the joint venture drew Japanese government scrutiny in 2021 after the company revealed that engineers employed by its subsidiary in China were able to access the personal information of Line users. A year later, Line Yahoo, or LY Corp, was designated “critical infrastructure” under Japan’s new economic security bill. 

Last November, LY admitted that a cyber attack had occurred on Naver’s network, resulting in the leak of personal data of about 510,000 Line users and others. This year, it further disclosed that information on 57,000 former Line employees may have been compromised.

Following the data breaches, the Japanese Ministry of Internal Affairs and Communications issued administrative guidance, suggesting that LY’s continuing dependence on Naver’s technology and its capital relationship hampered its ability to manage and supervise the South Korean group as its subcontractor.

In response, LY promised stronger cyber security measures, a separation of the systems between the two groups and a reduction in outsourcing. Shin Jungho, the reclusive South Korean founder of Line, who was originally from Naver, will step down from the LY board later this month. 

Meanwhile, SoftBank Corp is continuing discussions with Naver to review the current capital structure and assess buying a bigger stake.

“We will objectively judge whether the investment is worth the cost,” SoftBank Corp’s chief executive Junichi Miyakawa said last month.

Naver said it would make a decision that would maximise corporate value, while South Korea’s presidential office said Naver was unlikely to sell down its stake in the joint venture.

Haeyoon Kim, a non-resident fellow at the Korea Economic Institute of America, said the issue over who controlled Line was contentious because the messaging app was not just popular in Japan, but also in south-east Asia markets such as Taiwan, Thailand and Indonesia, where Korean and Japanese companies both wanted to increase their presence.

“The Korean position is that Tokyo’s concerns regarding privacy, data security and data storage could be addressed under the existing ownership structure, so why raise the ownership question at all?” said Kim. 

“You could apply the logic of data sovereignty to almost any digital platform operating in any country,” she added. “It raises the question of whether one should only use Korean platforms in Korea, or US platforms in the US.”