As Japan-Korea Ties Warm, a Quandary Emerges on Currency Swaps

  • Currency swaps line expired last February amid tensions
  • Agreement on 'comfort women' issue has improved relationship

Foreign-exchange swaps, a sought-after helpline among emerging markets in times of crisis, were one casualty of tensions between South Korea and Japan in recent years.

As ties warm, a quandary has opened over whether to reestablish a swaps line between the two countries.

Japan, which holds the world’s second-largest foreign-exchange reserves, says it is ready to cooperate if needed, but will wait for its neighbor to initiate talks. South Korea, which may want to avoid any appearance of needing assistance amid the current turmoil stemming from China, says it will approach any agreement cautiously and isn’t considering one now.

While the Bank of Korea trimmed its economic growth forecast Thursday amid the increased uncertainty spilling over from China, newly installed Finance Minister Yoo Il Ho said his country wasn’t short of reserves. The BOK is also forecasting a healthy current account surplus.

Reserves have almost doubled to $367.96 billion over the past decade and rank in the world’s top 10.

That’s an important cushion for the country amid slumping global equities, declines in Korea’s benchmark Kospi index and the won near a five-year low.

“Korea may feel the need for more currency swaps if capital outflows materialize,” said Kim Jung Sik, a professor of economics for Yonsei University in Seoul. “But even then, the priority would be having arrangements with the U.S., not Japan.”

The most recent agreement between the two countries, a $10 billion swaps line, expired in February last year amid simmering historical tensions that stemmed back to Japan’s colonial occupation of the Korean peninsula.

A “final and irreversible” accord last month over the issue of comfort women, who were coerced to serve in Japanese military brothels before and during World War II, has brought hopes for increased economic and military cooperation.

“While political tensions between Japan and Korea have eased recently, it’s still too early to say cooperation between the two countries is smooth,” said Kim.

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