Korea and Japan will drastically bolster their mutual currency defenses in case of another economic crisis after Japan proposed an unlimited currency swap line, a senior government official said on Tuesday. A meeting between President Lee Myung-bak and Japanese Prime Minister Yoshihiko Noda on Wednesday "could reach a conclusion" about the plan, he added.
Korea signed a US$3 billion currency swap contract with Tokyo effective from 2005, which was raised to $20 billion in December 2008 amid the global financial crisis. Once the crisis subsided, the limit was brought back to $3 billion in April last year.
Amid rumblings of another global recession, the two countries are in the final stage of discussing to what extent they should extend the swap line again, with observers speculating that it will be at least $20 billion.
The arrangement allows Seoul to swap won for yen in a crisis because the yen is one of three key global currencies alongside the dollar and the euro. But Seoul has never actually used the won-yen currency swap fund since it has mostly found itself short of dollars.
Some experts warn that Japan has its own reasons to propose the swap since the yen is strong, which is bad for exports, and is merely hoping to get it into circulation abroad.
"We have no reason for a currency swap deal either with the U.S. or with Japan because Korea has more than $300 billion in foreign reserves," a financial industry insider said. "Such a deal could strengthen the won and compromise export competitiveness due to expectations about an influx of dollars or yen from abroad."