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South Korea, Japan Agree to Resume Currency Swap at Diplomatically Touchy Time
Double-Edged Sword
South Korea, Japan Agree to Resume Currency Swap at Diplomatically Touchy Time
  • By Michael Herh
  • August 29, 2016, 01:00
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Yoo Il-ho (left), deputy prime minister and the minister of strategy and finance of Korea is sharing hands with Japanese Financial Minister Taro Aso in a government office building in Seoul on August 27.
Yoo Il-ho (left), deputy prime minister and the minister of strategy and finance of Korea is sharing hands with Japanese Financial Minister Taro Aso in a government office building in Seoul on August 27.

 

In a surprising move, Korea and Japan agreed to resume a currency swap. The agreement was made in one and a half years since the end of a US$10 billion currency swap in February last year. It is expected that the agreement will play a positive role in stabilizing the Korean financial market. But some people are raising concerns that the agreement means that Korea became one step closer to Japan which is a rival of China at a time when Korea-China relationships became frosty due to Korea’s plan to deploy the Terminal High Altitude Area Defense (THAAD) system on its soil. This means that the resumption of the currency swap can become a double-edged sword in Korean politics and economy. 

Yoo Il-ho, deputy prime minister and the minister of strategy and finance of Korea and Japanese financial minister Taro Aso virtually agreed to resume a Korea-Japan currency swap in the 7th Korea-Japan Finance Ministerial Meeting held in Seoul on August 27. “We tentatively agreed to resume the currency swap,” said an official at the Ministry of Strategy and Finance. “For several months, we will discuss details, including how large it will be, whether it will be an exchange of the Korean won with the Japanese yen or an exchange of dollars and how high interest rates will be. The size of the Korea-Japan currency swap peaked at US$70 billion in 2011.

It is forecast that basically, the resumption of the Korea-Japan currency swap help stabilize the Korean financial market. Japan with a limitless currency swap with the Federal Reserve System of the US which issues US greenbacks can become a breakwater if the Korean market is put into a turmoil. Most of all, Fed chairwoman Janet Yellen strongly hinted at an US standard interest rate hike on August 26 (local time). The Korean won-US dollar exchange rate is highly likely to soar on August 29 when the Seoul foreign exchange market will open. The currency swap agreement is expected to play a positive role in the market.

But some strongly refute that the agreement will have a half impact on the market since the time of the agreement is subtle. Nowadays, the Korean won-US dollar exchange rate is receiving a structural downward pressure as factors for a stronger Korean won crowded. S&P raised Korea’s credit ratings to a record high and the US Treasure Department recommended Korean foreign exchange authorities to refrain from market intervention, citing Korea’s excessively high current account surplus and the trade surplus with the US among others as reasons.  

Under the circumstances, a Korea-Japan currency swap can pull down exchange rates and weaken Korea’s export competitiveness by becoming another factor in strengthening the Korean won. The Korean won-US dollar exchange rate once rose above 1,200 won per dollar. But on August 26, the rate stood at 1,113.7 won per dollar, threatening to fall below the 1,100 level. 

In particular, some point out that with China looking unkindly at South Korea over the deployment of the THAAD on the Korean peninsula, the resumption for the swap can brew into a political controversy. 

Korea and Japan also agreed to take strong joint actions to break down the protectionism that pursues maximizing one’s own country’s profits and to push forward with the Regional Comprehensive Economic Partnership (RCEP) and the Korea-China-Japan FTA. Both sides also saw eye to eye on holding the 8th Korea-Japan Financial Ministerial Meeting in Japan next year.