Seoul cites improved external resilience and financial stability for the lapse


The country will not be renewing an expanded currency swap contract with Japan, citing Korea’s improved financial market stability, the Finance Ministry said on Tuesday.

“(The two countries) have decided to let the contract lapse as scheduled after considering Korea’s improved resilience to external risks and the increased stability in domestic and international financial markets,” said Deputy Finance Minister Choi Jong-ku.

The value of the bilateral currency swap contract will now return to $13 billion from the previous $70 billion, the government said.

In 2008, Korea and Japan had signed a $13 billion foreign exchange agreement to help jointly improve their resilience to global financial crises. The value of the deal was expanded temporarily to $70 billion last year.

Of the amount, $57 billion was set to expire on Oct. 31.

Japan confirmed Seoul’s decision, with Japan’s Finance Minister Jojima Koriki telling reporters in Tokyo that the extra money was now “unnecessary.”

Policymakers and experts here predicted that allowing the expiry to happen as scheduled would have a minimum impact on the domestic economy, which has recently been given a sovereignty rating upgrade by the world’s top three credit appraisers ― Moody’s, Fitch Ratings and Standard & Poor’s.

“There will be some impact as the currency swap had been acting as a sort of safety valve for the country’s foreign exchange reserves and foreign exchange market, but given the sound macroeconomic data that includes a sovereign rating increase, the effect is expected to be minimal,” said Cheong Yeong-shik, chief research fellow at Samsung Economic Research Institute.

The announcement from the two neighboring countries sparked attention as it came amid lingering tension between Seoul and Tokyo over the disputed Korean islets of Dokdo.

The government denied that the decision on the swap deal was related at all to the latest diplomatic spats with Japan over this issue.

President Lee Myung-bak in August paid a controversial visit to the islets to which Japan also claims sovereignty.

Japanese officials had been reportedly hinting that the currency swap deal may be subject to “adjustment” as tit for tat to the unprecedented visit.

Countries hedge against financial crises through swap deals with more stable currencies while also building up their foreign exchange reserves.

Korea previously signed a foreign currency swap agreement with the United States that expired in 2010 and holds similar deals with the Association of Southeast Asian Nations and China.

As of Friday, Seoul’s foreign reserves stood at about $322 billion, reflecting an increase from $201.2 billion at the end of 2008, according to government data.

By Kim Ji-hyun (jemmie@heraldcorp.com)