Japan's Chief Cabinet Secretary Osamu Fujimura told reporters on Wednesday that Tokyo is considering a "variety of options" when asked whether it could suspending a currency swap agreement with Korea. The remark was part of the diplomatic fallout of President Lee Myung-bak's visit to Dokdo and calls for a sincere apology from the Japanese emperor.
A currency swap agreement enables one country to loan foreign currency to another in the event of a foreign exchange crisis. Seoul and Tokyo signed a US$13 billion currency swap agreement and temporarily raised the amount to $30 billion in 2008, when the global financial crisis erupted. The amount fell back to $13 billion until the leaders of the two countries agreed in October of last year to boost it to $70 billion. The $57 billion increase signed last year expires this October, and Fujimura's comments hint that Tokyo may not extend it.
Korea's economy will not be severely affected even if the currency swap agreement ends. As of the end of July of this year, Korea has access to $314.3 billion worth of foreign currency reserves, while an additional $56 billion is available through a currency swap deal with China. Adding $38.4 billion available through the $240 billion Chiang Mai Initiative Multilateralization system fund, the total amount from currency swaps rises to $94.4 billion.
Seoul can also reactivate a $30 billion currency swap deal with Washington that expired in 2010. A halt in the currency swap agreement with Japan would simply mean one less buffer in case of an emergency.
But Japan is Korea's second-largest trading partner after China, while Korea is Japan's third-largest after China and the U.S. Korea, Japan and China compete fiercely in the global market for cars, steel and electronics, yet rely on each other through an intricate network of trade. The three countries form the biggest counterbalance against the formidable North American and European trading blocs. Korea and Japan both stand to lose a lot if they fall into a vicious cycle of diplomatic retribution.
The diplomatic tensions between Seoul and Tokyo are spreading into the economic sphere, which in turn could intensify resentment among the people of both countries. Japan's lurch to the right since the launch of the Noda administration is leading to a series of diplomatic clashes. More rational decisions and actions by the leaders of both sides are desperately needed.