Eyes are on whether political tension will affect bilateral economy


Eyes are drawn to whether the heightened diplomatic tension between Korea and Japan will affect their currency swap deal aimed at preventing a foreign currency liquidity crunch.

When asked by reporters at a press conference on Wednesday if the Korea-Japan currency swap deal might be reexamined, Japan’s Chief Cabinet Secretary Fujimura Osamu said his government would consider various options in regard to the swap deal, not ruling out the chance of a withdrawal from the agreement.

Seoul officials shrugged off Fujimura’s remarks which came after President Lee Myung-bak demanded an apology from the Japanese emperor for colonial-era wrongdoings prior to his visit to Korea in an annual Liberation Day speech earlier in the day.

Lee had also made a surprise visit last Friday to Korea’s easternmost islets of Dokdo, which Japan also claims its own, sparking diplomatic tension between the two countries.

Later the same day, Tokyo requested to delay a meeting between the two countries’ finance ministers which was scheduled for late this month.

An official at Seoul’s Finance Ministry said Fujimura’s comments reported by the Japanese media didn’t mean much and that the ministry has not received any official notice from Tokyo on the currency swap deal, which was made out of both countries’ needs.

The two countries expanded the size of their currency swap from around $13 billion to $70 billion through a summit in October last year. The deal on $57 billion expires in October.

“Even if Japan chooses not to re-extend the currency swap agreement of $57 billion, it would affect only about 12 percent of Korea’s foreign reserves,” the official said.

“We have various options in mind for the worst case scenario.”

A high-ranking official at Cheong Wa Dae said it remains to be seen whether Japan would reconsider extending the currency swap deal.

“Even if Japan decides not to re-extend the agreement, it would barely affect us since we already have more than $300 billion in foreign reserves and plenty of cushion against a foreign exchange crisis including a currency swap deal with China,” he said.

Korea has a $56 billion currency swap deal with China and can withdraw up to $38.4 billion in case of a crisis from a $240 billion fund under the Chiang Mai Initiative Multilateralization agreement.

Korea’s foreign reserves amounted to $314.35 billion as of last month, according to the Bank of Korea.

By Kim So-hyun (sophie@heraldcorp.com)