(Nikkei: February 24, 2014 – p. 4)
The currency swap arrangement between Japan and South Korea in which the two countries mutually finance dollars in the event of of a financial crisis expired on Feb. 23. The deteriorating bilateral diplomatic relations were a factor in the decision to end the arrangement. As the U.S. Federal Reserve Board (FRB) is expected to raise the interest rate within this year, the end of the currency swap may affect the currency protection network that is designed to prevent the exchange rate from dropping sharply.
Although the Japanese and the South Korean governments have ended the currency swap, they are planning to restart on May 23 a minister-level financial dialogue. The bilateral currency swap began in 2001. In response to the European debt crisis that was becoming serious, Japan’s financing for South Korea peaked at $70 billion in 2011. After former President Lee Myung-bak visited in 2012 the disputed islands known as Dokdo in South Korea and as Takeshima in Japan, the amount shrank to as much as $10 billion in the latest count.
When announcing the ending of the currency swap on Feb. 16, an official of the South Korean Strategy and Finance Ministry said, “The ending will not affect the fundamentals of the country’s economy.” However, during bilateral negotiations, South Korea sought to extend the currency swap because, “the swap is significant as a symbol that Japan could provide support in the event of a emergency” (an official of the South Korean Strategy and Finance Ministry). Out of concern that a sharp change in the exchange rate could have a negative impact on the financial market, the Japanese Finance Ministry also attempted to extend the currency swap, but it was ended on account of the deterioration in diplomatic relations. (Translated by Nikkei/Edited by MATT)