Not only South Korea’s financial industry but also financial authorities are paying attention to the possibility of a large-scale Japanese capital outflow as South Korea has decided to terminate its General Security of Military Information Agreement (GSOMIA) with Japan. Although there is a low possibility of Japanese capital leaving the South Korean market all at once, a large amount of capital from other advanced countries, including the United States, is likely to flow out from the country due to growing uncertainty caused by worsening relations between the two countries. The offshore exchange rate has already jumped above 1,210 won.
The total amount of loans given out by Japanese banks which run business in South Korea came to 23.40 trillion won (US$19.29 billion) as of June, according to the Financial Supervisory Service (FSS) on Aug. 22. Corporate loans stood at 13.50 trillion won (US$11.13 billion), accounting for 64.7 percent of the total. The amount of Japanese bank loans to South Korean conglomerates reached 13.1 trillion won (US$10.80 billion), taking up 63 percent of the total. In contrast, loans to households totaled a mere 600 million won (US$494,640).
By industry, manufacturing topped with 8.80 trillion won (US$7.25 billion), or 42.1 percent of the total, followed by finance and insurance at 7 trillion won (US$5.74 billion), or 33.8 percent, wholesale and retail at 2.60 trillion won (US$2.13 billion), or 12.4 percent, and lodging and restaurant at 800 billion won (US$655.63 million), or 4 percent. South Korean companies are unlikely to face a sudden crisis of bankruptcy even if Japanese banks recall loans at the same time, as they can rely on alternative funding sources.
In fact, loans from Japanese banks amount to only 1.2 percent of domestic banks’ total lending. However, if the relations between South Korea and Japan continue to deteriorate, a considerable number of investors from other countries may leave the South Korean market, causing a surge in the exchange rate and turmoil in the financial market.
With the latest decision to terminate GSOMIA, the exchange rate has soared. Increasing uncertainty in relations between the two countries is expected to make the domestic financial market more volatile.