Territorial dispute threatens to derail Japan-South Korea bond purchase deal

Kyodo

Japan could shelve a plan to purchase South Korean government bonds amid growing tensions over the disputed islets in the Sea of Japan, Finance Minister Jun Azumi indicated Friday, apparently seeking an apology from Seoul for “excessive behavior” by its president.

Azumi also told reporters that whether Japan will continue to help South Korea secure sufficient dollar funds depends on how it responds to Tokyo’s frustration over President Lee Myung Bak’s landing on the islets earlier this month and his call for an apology from Emperor Akihito for the colonial period.

The situation appears to have escalated to a level where “the people of Japan can no longer consider the economy and politics as separate,” Azumi said.

Japan and South Korea agreed in May to the plan for mutual bond purchases to enhance economic ties. With details having yet to be finalized, Azumi said, “We will wait and see for the time being.”

The plan involves China for trilateral cooperation. Japan also agreed with China on mutual purchases of sovereign debt.

South Korea could fail to secure adequate dollar funds in an attempt to withstand market instability following the financial crisis in Europe.

Tokyo and Seoul agreed in October to upgrade their currency swap contracts to $70 billion from $13 billion mainly to help South Korea, which wanted to intervene in the currency market to prevent the won from sharply weakening against the dollar, according to Japanese officials.

The temporary expansion of the swap arrangement is due to expire at the end of October.