Japan and South Korea will not renew a US$57 billion currency swap facility designed to protect their economies against financial crisis, a decision they said was not related to a territorial dispute that has cast a chill over ties between the neighbors.
Officials from both countries were quick to stress yesterday’s decision not to extend the facility, set up in October last year as concerns mounted about the US budget deficit and Greece’s possible default, was made purely on economic grounds.
However, it may raise questions about the network of bilateral swaps many Asian countries have set up if the agreements could be seen to come under pressure due to a diplomatic stand-off.
“It’s not that the principle of separating economics from politics has been broken, but that this decision was made purely on an economic point of view,” South Korean Deputy Finance Minister Choi Jong-ku said in Seoul. “It is against principle to extend even when there is no need.”
The value of bilateral currency swap arrangements between the two will return to US$13 billion at the end of the month from US$70 billion, South Korea’s central bank said in a statement.
A political row broke out between Seoul and Tokyo last month after South Korean President Lee Myung-bak visited islands that both countries claim sovereignty over.
Japan is also embroiled in a territorial dispute with Taiwan and China over a different group of islands. Both rows are testing the limits of Japan’s economic cooperation with its neighbors.
The expanded swaps were put in place last year as problems in the US and Europe had sparked fears of a repeat of the 2008 global financial crisis and 1997-1998 Asian financial crisis, with South Korea seen vulnerable to capital flight.
The risks of an exodus of capital have receded since then even though the economic outlook remains uncertain, financial market volatility has fallen and South Korea’s economic fundamentals have improved.
“Japan and South Korea reached a conclusion that extension would not be needed, while sharing a view that financial markets have stabilized and macro economic situation has become healthy,” Japanese Finance Minister Koriki Jojima said in Tokyo.
The remaining swap facilities could be expanded if needed, although there is no automatic right to access extra funds.
In a signal that economic links are still open, a Japanese finance ministry official said yesterday the government would consider purchasing South Korean government bonds from now on, although no decision had been made.