Korea-Japan currency swap likely to be signed for first time in 8 years

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho leaves Gimpo International Airport to attend the Eighth Korea-Japan Finance Ministers’ Meeting and raises his hand to reporters on the morning of June 29. [Photo by Yonhap]

South Korea and Japan are currently in the final stages of coordinating the resumption of a currency swap agreement that has been dormant for eight years. As part of the ongoing discussions, one potential approach being considered is to execute the swap based on the U.S. dollar.

According to officials from the Ministry of Economy and Finance and other relevant ministries, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho is scheduled to hold the Eighth Korea-Japan Finance Ministers’ Meeting with his Japanese counterpart Shunichi Suzuki in Tokyo on Thursday. It is widely anticipated that the meeting will result in the confirmation of the revival of the currency swap between the two countries.

A currency swap is a contractual arrangement that enables countries to exchange their currencies or U.S. dollars with each other during emergency situations such as foreign exchange crises. In the case of the proposed South Korea-Japan currency swap, it is being contemplated that the exchange would involve the conversion of Korean won into U.S. dollars held by Japan, while Japanese yen would be exchanged for U.S. dollars held by South Korea.

The scale of the swap is currently under discussion, with a range of $2 billion to $10 billion being considered. Although the magnitude may not be significant compared with previous swap agreements, this measure holds symbolic importance as it reflects the significance of financial cooperation between South Korea and Japan.

The initial currency swap between the two countries was initiated in July 2001 with a scale of $2 billion. Over time, it expanded to $70 billion by the end of 2011. However, following the expiration of the contract in February 2015 and the subsequent cooling of diplomatic relations, the currency swap arrangement remained inactive.

It is believed that executing the currency swap based on the U.S. dollar would yield similar effects to the South Korea-U.S. currency swap. Japan has an existing unlimited and indefinite swap agreement with the U.S.

During the upcoming meeting, the finance ministers are expected to engage in discussions regarding various areas of cooperation, including joint infrastructure projects in third countries, financial safety net-related collaboration such as the Chiang Mai Initiative Multilateralization and potential measures for financial and tax cooperation.

This Korea-Japan Finance Ministers’ Meeting marks the first of its kind in seven years since August 2016. Choo and Suzuki agreed last month to resume their shuttle meetings. Additionally, on Friday, Choo will convene an investor roundtable, where prominent Japanese banks will be present.

The Ministry of Economy and Finance said that the Korea-Japan currency swap will be discussed at the Korea-Japan Finance Ministers’ Meeting, but no decisions or agreements have been finalized at this stage.