The Ministry of Strategy and Finance and The Bank of Korea announced on June 24 that they opted not to extend the Korea-Japan currency swap agreement. The deal, which is worth US$3 billion, is scheduled to expire on July 3. The bilateral contract has continued for eight years.
As a result, the currency swap agreement between the two countries, and which is based on the Chiang Mai Initiative between the three Northeast Asian nations and Southeast Asian nations, will be reduced to US$10 billion.
The total had increased to as much as US$70 billion in October 2011, but fell to US$13 billion in August last year, when former Korean president Lee Myung-bak visited Dokdo Island; worsening diplomatic relations between Korea and Japan. At that time, Japan explained that it did not increase the contract amount as Korea made no request to do so. More recently, the Japanese government has been claiming that it would extend the agreement only on condition that Korea asks for an extension.
In regards to the issue, The Bank of Korea governor Kim Choong-soo said two weeks earlier, “The currency swap deals’ purpose is to stabilize the financial market, but the Korean government has made use of only that signed between Korea and the United States,” implying that he would not extend the won-yen currency swap arrangement. He went on to say, “Even part of the deal between Korea and China has been used fortrade settlement yet the one between Korea and Japan has not been employed at all, with the amount of US$3 billion having little meaning.”
Japan has also been rather pessimistic in regards to the extension. Chief Cabinet Secretary Yoshihide Suga said at a press conference held on June 21, “We would extend the agreement if it was deemed necessary, but will not try to do so if Korea says the deal is of little help.”
Why Is It Terminated?
Financial experts are claiming that the decision is because the contract amount is as small as US$3 billion, the agreement is based on the conversion of the Korean currency into the Japanese yen, not the US dollar, and that currency swap is not such an urgent matter given both countries’ financial conditions recently.
However, some are commenting that deteriorating diplomatic relations between the two should be factored in as well. According to these, Japan has tried to use the currency swap for political purposes, like it did last year when part of the currency swap dealcame to an end. The Japanese government has played the media for a while concerning the currency swap, for example repeatedly claiming that Korea is begging for an extension. The strategy is said to have to do with the government’s attempt to raise its approval rating. The Abe administration’s conservative swing is also a contributing factor.
How Will the Korean Economy Be Affected by the Discontinuation?
In the meantime, termination of the contract is unlikely to significantly affect the Korean financial market. “The current economic difficulties Korea is experiencing is not because of the lack of yen,” said Lim Hee-jeong, a research analyst at the Hyundai Research Institute, adding,“The termination is not expected to act as an important variable in the market.”Another financial industry source added, “The currency swap between Korea and Japan has been of little help up until now, carrying less weight than the one with China.”
At present, Korea and China are in a currency swap deal worth US$58 billion, which is the largest amount since the mutual contract began.