Seoul and Tokyo should not deviate from economic logic in handling the issue of extending their currency swap deal. Their monetary policymakers are urged to exercise wisdom to save a mutually beneficial accord from being ditched in a diplomatic rift that should be bridged to build a long-term partnership between the neighbors.
The agreement made by the two sides a year ago to increase their currency swap arrangement to $70 billion from $13 billion is to expire at the end of this month. Its extension, which was supposed to have been smoothed out, still remains up in the air with bilateral ties strained by rekindled territorial and historical disputes.
In response to President Lee Myung-bak’s visit in August to Korea’s easternmost islets of Dokdo also claimed by Japan, then Japanese Finance Minister Jun Azumi said a decision on whether to extend the currency swap deal “cannot be completely free of the public sentiment.” Tokyo has not yet shown signs of excluding political considerations from the economic matter, with a Japanese financial official reportedly suggesting last week Japan would scrap the accord without a formal request from Seoul to renew it.
With Tokyo maintaining a reserved stance, Seoul officials find themselves facing an awkward choice between going without the deal and asking for its extension in a way that could give the impression of seeking favor from Japan.
The right path for the two sides is to agree on extending the agreement in a practical way focusing on monetary cooperation without being swayed by political pressure and public sentiment. Tokyo is urged to abandon the narrow-sighted attempt to bring its economic strength to bear on Seoul. Korean officials are also advised to depart from their undetermined position and move forward to save the deal.
A proper occasion for concluding the issue will be the annual meetings of the International Monetary Fund and the World Bank in Tokyo this week, during which finance ministers from the two countries are expected to hold separate talks. In an interview last week, Japan’s Finance Minister Koriki Jojima vowed to do “all I can” to enable his country to contribute to global economic stability. His pledge would sound only hollow unless Japan maintains an agreement with its closest neighbor to strengthen preparedness for future turmoil in global financial markets.
In retrospect, Japan should not have raised the question of the currency swap deal in the diplomatic tit for tat following Lee’s visit to Dokdo and Korea should not have been quick in downplaying the possible impact of Tokyo’s move on its economy, drawing a line between political and economic bilateral ties.
It was Korea that proposed the currency swap deal in 2008 amid the global financial crisis and asked to expand it last year. But in current terms, Seoul has no reason to beg Tokyo for its extension as it has foreign currency reserves of more than $320 billion plus the additional amount worth $107.4 billion available from a separate swap line with China and the Chiang Mai Initiative Multilateralization agreement. The deal with Tokyo is meaningful as a psychological weapon rather than an arrangement with practical effectiveness. Japan might not feel the necessity of the accord as much as Korea. But it is also positioned to benefit from the deal, which helps prevent Korean won weakness and check against the expansion of Chinese yuan’s influence. More fundamentally, economic difficulties of one country will have adverse impact on the other’s economy in their interdependent relationship.
The two sides should settle the currency swap issue based on the framework for a broader partnership and show that it can be possible to maintain and enhance economic cooperation through conflicts over historical and territorial matters.
