Prospect of Resuming Korea-Japan Currency Swap After 8 Years... Dollar Base Mentioned

South Korea and Japan are reportedly in final negotiations to resume their currency swap agreement at the Korea-Japan Finance Ministers' Meeting held in Tokyo on the 29th. The likely method involves South Korea depositing Korean won with Japan and borrowing US dollars in emergencies. This means that when South Korea deposits won, Japan provides US dollars, with the scale expected to be at least 2 billion dollars.

According to the government, on this day, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho will hold the Korea-Japan Finance Ministers' Meeting with Japanese Finance Minister Suzuki Shunichi in Tokyo and announce the resumption of the currency swap. A currency swap is a concept where, in emergencies such as a foreign exchange crisis, a country deposits its currency with the other country and borrows the other country's currency or US dollars at a pre-agreed exchange rate. Korea and Japan first signed a currency swap worth 2 billion dollars in July 2001 and expanded it to 70 billion dollars by November 2011. However, due to deteriorating Korea-Japan relations, the currency swap agreement between the two countries ended in February 2015.

This currency swap agreement is being discussed in a way that South Korea deposits won with Japan and borrows Japan's US dollars. Until now, when Korea signed currency swaps with Japan, the method involved exchanging won and yen or providing won and borrowing yen and US dollars together. However, this time, if Korea deposits won, Japan is likely to lend US dollars, and if Japan provides yen, Korea will also lend US dollars. The scale of the currency swap agreement is expected to range from 2 billion to up to 10 billion dollars.

If the Korea-Japan currency swap is promoted based on the dollar, it is expected to make securing dollars easier in emergencies. This is because it allows securing dollar liquidity in times of crisis. Although the scale of the currency swap is not expected to be large, it is evaluated as meaningful in that the thawing mood between Korea and Japan is beginning to take shape as economic cooperation. In the financial sector, it marks the restoration of cooperation between the two countries after eight years.

In Japan, the dollar-based currency swap is viewed positively. The judgment is that by borrowing dollars instead of providing yen to Korea, they can respond to yen weakness. The Nihon Keizai Shimbun reported the previous day, "Deputy Prime Minister Choo and Japanese Finance Minister Suzuki Shunichi will hold talks in Tokyo the next day and resume the currency swap," adding, "final negotiations on the swap scale and other details are underway."

An official from the Ministry of Economy and Finance explained, "The specific details of the Korea-Japan currency swap will be finalized at the Finance Ministers' Meeting on this day." The Finance Ministers' Meeting will also discuss international financial agendas, joint entry into third-country infrastructure, cooperation related to financial safety nets, and financial and tax cooperation measures.

[Image source=Yonhap News]