[Editorial] Neighborly relations

In announcing a decision not to renew a currency swap contract with Japan on Tuesday, South Korea denied that domestic politics over a territorial dispute had a hand in making the decision. So did Japan, which claimed that the decision was based “purely on economic and financial factors.”

Both of them were saying it was no longer necessary to extend the $57 billion swap deal because Korea had gained resilience to external financial risks. But few would believe it was Korea’s improved economic and financial conditions alone that led Korea and Japan to put an end to the contract on its Oct. 31 expiration date.

True, the Korean economy is healthier now than last year when Korea agreed with Japan to expand currency swaps from the existing $13 billion to $70 billion, as evidenced by the recent upgrading of Korea’s sovereign credit ratings by Moody’s, Fitch and Standard & Poor’s. Moreover, the decision not to extend the swap deal did not have any discernable impact on the value of the Korean currency.

This is not to say Korea has become invulnerable to global financial crises. Few Korean economic policymakers would believe the $320 billion Korea keeps in its foreign reserves would be large enough to shield it from any future economic crisis comparable in scale to the 2008-09 Great Recession.

A review of what has followed President Lee Myung-bak’s August visit to South Korea’s easternmost Dokdo islets, to which Japan lays an unwarranted territorial claim, will show what has actually caused the two countries to scale down bilateral economic cooperation.

In a protest against Lee’s visit to the islets, Japan included an end to the $57 billion swap deal among its potential economic sanctions against South Korea. When tension escalated, Japan said it would not consider renewing the deal unless it was officially requested by the Lee administration. Offended by what it apparently regarded as a humiliating condition, South Korea decided not to ask for its renewal.

Japan never fails to lodge a protest when it feels that action taken by Korea would be detrimental to its claim to the Dokdo islets. Korea does not pay much attention to such protests, but Japan went too far when it threatened Korea with economic sanctions after Lee visited the islets, which Korea not only holds in its possession but keeps under its control. Given the sentiment the Korean public harbored against the Japanese threat, it was out of the question for the Lee administration to ask for a swap deal extension even if it wanted one.

Korea’s exposure to a financial risk, though not as great as several years ago, will increase in proportion to the loss of protection the swap deal would have provided. Given that what is done cannot be undone, at least in the foreseeable future, Korea will have to take additional measures for its financial stability, at its own expense if necessary. That is the price it has to pay for territorial integrity.

For its part, Japan, as an Asian leader, has more to lose than to gain from the decision to end the swap deal. It cannot free itself from an accusation that it has dismantled a safety device against the kind of regional financial meltdown that Asian countries experienced in 1997-98. The reason is that the Korean-Japanese currency swap deal was launched in the context of the 2010 Chiang Mai Initiative ― a multilateral currency swap arrangement among the 10 members of the Association of Southeast Asian Nations and the three Northeast Asian countries of China, South Korea and Japan.

When the antagonistic feelings Koreans and Japanese hold against each other are taken into consideration, the two countries can hardly expect their relations to improve anytime soon. After all, foreign policy is said to be an extension of domestic policy, with local concerns taking precedence over foreign relations.

Still, the Korean president and the Japanese prime minister will have to strive to keep tension from escalating. The two countries are so tightly interwoven not just in economic areas but in all other fields that their neighborly relations cannot be allowed to deteriorate for long. The two leaders will do well to start mending fences before it is too late.