The Bank of Korea on Thursday lowered South Korea's economic growth forecast for this year to 2.2 percent.
This is down from its earlier projection of 2.5 percent back in April.
Central bank governor Lee Ju-yeol raised the alarm over worsening conditions both at home and abroad.
"Domestic consumption has continued to improve, but facility and construction investment have decreased, and sluggish exports and investment were major reasons behind the downward revision. The slowing global economy also led to a fall in semiconductor exports."
When asked if Japan's latest export curbs influenced the central bank's forecast, Lee said that it did and added if Japan dials up economic pressure, it could have a measurable impact on Korea's economic growth.
In addition, the Bank of Korea slashed its policy rate by 25 basis points to 1.five percent to help spur growth amid prolonged trade tensions.
This is the first rate change since last November when the central bank raised the rate by 25 basis points to one.75 percent.
The BOK pointed to growing external uncertainties, including the long-running dispute between the U.S. and China and Korea's trade spat with Japan.
"The worsening Seoul-Tokyo trade dispute has pushed the BOK to not only cut rates, but also lower the country's economic forecast. With exports and domestic demand already sluggish, this incident could further depresss economic activities like consumer spending. The country could even fall short of the new 2.2% growth forecast."
In fact, many analysts had expected the move to happen in August, with the U.S. Federal Reserve expected to lower its own key rate at the end of this month.
But with the U.S. economy and its labor market health being viewed favorably by the Fed,there is now speculations that the U.S. central bank may not even cut rates, which encouraged the BOK to go ahead with its decision.
The unexpected rate cut also comes after seven consecutive months of decline in the country's exports.
Exports, a key driver of South Korea's economic growth, could face further headwinds due to Japan's latest export curbs which target key materials for the production of semiconductors and display panels.
"The Bank of Korea said it will maintain its accommodative policy stance to support the domestic economy and carefully monitor the U.S.-China trade war, as well as Japan's latest export curbs.
KIM Da-mi, Arirang News."