World Economy

Japan, S. Korea Suspend Currency Swap Deal

South Korea and Japan have cancelled their currency swap deal over a World War Two-era statue
South Korean Exchange building in Seoul.
South Korean Exchange building in Seoul.
Foreign reserves around the world plunged by 10% compared to the volume in July 2014

Japan’s decision to suspend talks on a currency swap with South Korea last Friday will have limited impact while caution is still advised, according to economists and experts.

Song In-chang, Soeul's deputy finance minister, played down a possible repercussion of the suspension of the bilateral currency swap deal, saying that “It wouldn’t have much impact as it is not like an existing program ended,” wire services reported.

Sung Tae-yun, economics professor at Yonsei University said, “It is very unlikely that there would be an exodus of dollars from the domestic market and make the foreign exchange market unstable.”

Other experts also pointed out that a currency swap with Japan is not vital considering South Korea’s ample foreign reserve and other swap deals with countries like China and Malaysia.

They also noted that the negotiations had already been predicted to be difficult considering the deal having been politically influenced in the past.

Safety Net

The previous currency swap deal expired on February 2015 after 14 years of operation amid chilly bilateral relations over historical and territorial issues.

Some, meanwhile, also said that extra swap programs would still be a safety net for Korea as it enables each nation to secure dollars from the other in exchange for their own currency during financial emergencies.

“Putting aside political agendas, a currency swap between Korea and Japan is economically beneficial, ”Rye Keun-kwan, economics professor at Seoul National University, had said in previous news reports. “Therefore, it is not right if the deal is suspended due to political reasons.”

But while recognizing benefits of a swap deal, Chang Jae-chul, an economist at Citibank Korea Inc. said that additional swap deals are not vital right now considering the country’s ample foreign currency reserves and improved external balances since the global financial crisis.

Korea’s foreign-exchange holdings stood at $371 billion as of the end of December, according to the Bank of Korea data.

WWII Replica Dispute  

Japan on Friday announced that it was withdrawing from the talks on the Korea-Japan currency swap citing Korea’s decision to cover a replica WW2-era statue.

Korea had proposed to resume negotiation on the swap deal with Japan, the world’s second-largest foreign currency holder, on a foreign-exchange reserve of more than $1.2 trillion. The two nations reopened negotiations in August.

South Korea has swap deals with United Arab Emirates, Malaysia, Australia and Indonesia. It is also part of the multilateral currency swap deal called Chiang Mai Initiative, an emergency dollar liquidity facility created after the 1997 Asian currency crisis among South Korea, China, Japan and the Association of Southeast Asian Nations.

The countries will discuss the expansion of the CMI in May in an attempt to prevent another currency crisis.

However, South Korea needs to strengthen its readiness for turbulence in global markets nonetheless, market watchers said, and authorities vowed to stabilize foreign exchange markets under the uncertainty over the new US administration and growing tension between South Korea and China.

The currency swap program between Korea and China worth $56 billion is set to expire in October. The two countries could face bumpy negotiations in renewing the swap deal amid political tension over Korea’s decision to station the US Terminal High Altitude Area Defense.

Amid the strengthening dollar, many countries are trying hard to defend their currencies amid rising volatility and uncertainty in the markets.

Foreign reserves around the world plunged by 10% compared with the volume in July 2014 to $10.8 trillion as of Friday according to data compiled by Bloomberg. The foreign reserves had increased after the financial crisis in 2008 and 2009 until it began to decline in mid-2014.


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