Currency Swap between South Korea and Japan Likely to be Expanded

The Ministry of Strategy & Finance of South Korea said on September 27 that South Korea and Japan are likely to sign a currency swap deal worth at least US$50 billion. The two countries agreed last month on the resumption of their currency swap. The first currency swap deal between them was signed in 2001 and the amount has been increased by small amounts such as US$3 billion and US$10 billion. An increase of more than US$50 billion at a time has been carried out only in 2011, when the increment was US$53 billion.

The ministry’s prediction is based on factors related to China. At present, a US$54 billion currency swap is in effect between South Korea and China. Japan is likely to expand its currency swap with South Korea in order to keep China in check.

Japan has been politically sensitive to the size of the currency swap between South Korea and China. Back in 2008, South Korea pursued currency swap expansion with China and Japan. At first, Japan was reluctant, thinking that such an expansion was not beneficial economically. However, it changed its stance upon hearing the news that the currency swap between China and South Korea would be expanded to US$30 billion. In the end, each of the currency swaps with Japan and China was expanded to US$30 billion in December 2008.

In 2011, that between South Korea and Japan totaled US$70 billion. The amount increased by no less than US$57 billion at a single time in view of the financial crisis in Europe. Then, former President Lee Myung-bak’s visit to Dokdo deteriorated their bilateral relations and the agreements expired one after another without maturity extension. The amount dropped to zero in February last year.

The large currency swap to come is expected to contribute to a significant improvement in the bilateral political and economic relations of South Korea and Japan. Still, opinions are split on its potential effect on the relations between South Korea and China. In the meantime, the currency swap between South Korea and China is scheduled to expire in October next year. The two countries already agreed on extension and expansion but have yet to discuss specifics.