In response to the escalating economic conflict between South Korea and Japan, financial authorities here are establishing a contingency plan in case Tokyo expands its trade restrictions to the financial sector, officials said Monday.

The preemptive gesture came out of concern about the apparent dependency of local financial companies on Japanese lenders, which have been offering a low interest rate for years.

The total amount of Japanese money circulating in Korea’s financial market was estimated at 52.9 trillion won ($44.9 billion) as of end-June, according to data compiled by Rep. Jeon Hae-cheol of the ruling Democratic Party.

This tentative total included 13 trillion won worth of stocks and 1.6 trillion worth of bonds held by Japanese investors as of end-June, as well as 24.7 trillion won worth of loan credit by Japanese banks operating in Korea as of end-May.

What has especially put Seoul’s market regulators on guard was the $17.56 billion that Korean banks and credit card operators borrowed from Japanese lenders.

Of the amount, banks accounted for 53 percent or $9.26 billion. While credit card operators accounted for less than half, they are seen as facing higher volatility due to their heavy dependence on low-interest Japanese loans.

The policy regulator Financial Services Commission and market watchdog Financial Supervisory Service, along with major banks, are currently operating a special task force to check on the credit maturity of Japanese loans and to draft a contingency plan, officials said.

As for the FSC, officials are carrying out an extensive stress test, including the possibility of a 100 percent withdrawal of Japanese money from the local market, in which case regulators may provide an emergency injection of liquidity into individual financial companies.

However, observers claimed that Seoul’s financial market will remain resilient, even if Japanese lenders choose to take extreme actions.

“Based on the experience of the 1997 Asian financial crisis and the 2008 global financial crisis, we are fully ready to come up with an extensive (contingency) plan right away when necessary, but there is no need to distort reality and overreact,” said an FSC official.

“The possibility of Japan’s retaliation in the financial sector is relatively low, and also (Korea’s financial market) has sufficient capacities of contingency actions.”

Financial policymakers have already set up plans to provide liquidity to companies directly hurt by Japan’s export curbs.

The government earlier vowed to inject some 10 trillion won in policy financing during the latter half of the year. This amount, along with an additional 7.5 trillion won of trade financing funds, will be used to support local companies amid the bilateral trade tension, according to officials.

(tellme@heraldcorp.com)