The Korea-Japan currency swap has been a hot-button issue every time before its expiration. When former President Lee Myung-bak visited Dokdo on Aug. 15, 2012, bilateral relations cooled rapidly and the Ministry of Finance of Japan said that it would not extend the agreement if not requested. As a result, the currency swap was reduced from US$70 billion to US$13 billion.
Things were similar in the following year. Japan said in June that it would examine the extension on condition of Korea’s request when the US$3 billion portion was about to expire. The Korean government showed its discontent with Japan’s attempt to take advantage of the currency swap in the middle of the chilled bilateral relations, and the agreement for the portion expired as scheduled.
This is being repeated now, too. Both governments are not willing to ask for an extension. Their lukewarm stance is not just about a tug of war, though. Rather, they are doing so because they are confident of their respective measures for foreign exchange market stabilization. Korea’s foreign exchange reserves increased 18 times from US$20.4 billion to US$362.2 billion between 1997 and January this year, and its current account balance is expected to turn from a deficit of US$10.3 billion into a surplus of US$94 billion between 1997 and this year to hit a new high for three consecutive years. In addition, the Korean government is currently regulating forward exchange positions and levying taxes on bond investment by foreigners while expanding the bank tax to the non-banking sector for better forex market protection.
The tight diplomatic relations between the two countries are affecting attitudes as well. Recently, Prime Minister Shinzo Abe visited the Holocaust Memorial in Berlin, but mentioned nothing about the comfort women issue, which fuels anti-Japanese sentiment in Korea. Under the circumstances, the Korean government has found no reason to extend the inessential currency swap.
Japan, on its part, is the third-largest economy in the world and its foreign exchange reserves are second only to China’s, which means it does not have to hurry to extend the contract.