Speculation has been raised here that Japan may propose to reopen a currency swap line with South Korea that was closed in February 2015, during a meeting of finance ministers from the two countries in Seoul this weekend.

Observers say it is possible for Tokyo to make the proposal as part of efforts to draw Seoul closer to it at a time when South Korea sees relations with China fraying over its decision to introduce an advanced U.S. missile defense system.


Tokyo announced earlier this month it would swiftly make a 1 billion yen ($9.9 million) contribution to a fund set up to help settle the issue of Japan’s colonial-era sexual enslavement of Korean women.

A Finance Ministry official said the estranged ties between Seoul and Beijing have heightened the possibility of a currency swap line being resumed between Seoul and Tokyo.

“Japan may take a more active approach to the matter at this point in line with its policy to keep China in check,” said the official, asking not to be named.

Korea and Japan signed their first currency swap deal worth $10 billion in 2001. The size of the swap arrangement between them increased to $70 billion in 2011 before shrinking to $13 billion in 2012 and $10 billion in 2013 and being terminated altogether in 2015 as bilateral relations became strained over historical and territorial issues.

In recent years, Japanese officials have suggested they are ready to consider expanding or reopening the currency swap line with Korea if Seoul makes a request first. Korea has not responded to this suggestion, which it sees as reflecting Japan’s intention to use an economic tool to affect its position on pending diplomatic issues between the two sides.

In a meeting with reporters last week, Finance Minister Yoo Il-ho remained cautious when asked whether the currency swap issue would be on the agenda for the upcoming meeting with his Japanese counterpart.

“With less than 10 days left before the talks, it is undesirable to take an impatient approach,” he said, adding that a swap arrangement could not be concluded in a day or two.

The minister still expressed his perception that Korea might well have a tighter net of currency swap deals with major economies, including the US and Japan.

In recent years, Korea has kept robust external soundness, piling up the world’s seventh-largest foreign exchange reserves and holding its ratio of short-term debt below 28 percent. Global credit appraiser Standard & Poor’s recently raised the country’s sovereign rating from “AA-” to “AA,” helping increase the inflow of foreign capital into its equity markets.

As a relatively small and open economy, however, Korea remains vulnerable to changes in external conditions. Some experts have raised concerns that a wide fluctuation in the value of the won against the US dollar could turn the country into an easy target for international currency speculators when global financial markets plunge into turmoil again in the future.

Reinstating the swap line with Japan would serve to reduce such a risk as the Japanese yen is considered a safe-haven asset, with the Bank of Japan having an unlimited currency swap arrangement with the US Federal Reserve.

Observers here say Seoul may still remain cautious if Tokyo takes the initiative toward concluding a new swap agreement between the two sides, as the move could make China feel South Korea is getting further away from it.

President Park Geun-hye is expected to seek to ease tensions between Seoul and Beijing when she meets with her Chinese counterpart Xi Jinping during the Group of 20 summit to be held in Hangzhou, China, next week. It may not seem opportune to highlight enhanced cooperation between Seoul and Tokyo just days ahead of the crucial encounter.

Japan’s proposal to reopen a currency swap line may also come with a demand Seoul lift a ban on imports of fisheries products from eight prefectures that may have been affected by the 2011 meltdown at the Fukushima nuclear plant. Last year, Japan filed a complaint against the measure to the World Trade Organization.

Experts here say Seoul needs to consider scrapping the ban before going through the WTO arbitration process, putting concrete scientific evidence ahead of ambiguous public anxiety.

In a meeting of select ministers convened last week to review external economic conditions, Yoo pledged to strengthen efforts to “reject all forms of protectionism” through bilateral and multilateral summit diplomacy and ministerial-level channels with other countries.

Experts say taking an objective and reasonable approach to the dispute on Japanese fisheries products would help Seoul enlist support from Tokyo in trying to subdue trade protectionism across the world.

By Kim Kyung-ho (khkim@heraldcorp.com)