Tokyo and Seoul agreed Tuesday not to extend their expanded currency swap accord amid heightened territorial tensions.
“We are terminating the agreement as scheduled initially,” Finance Minister Koriki Jojima said during a news conference in Tokyo. Bringing the deal to an end on Oct. 31 “was agreed by both sides with mutual understanding,” he said, adding the decision was unrelated to the diplomatic flap that started in August when South Korean President Lee Myung Bak visited the South Korea-held islets in the Sea of Japan claimed by Japan.
“This was not a political decision,” he explained, adding that both governments felt the market had stabilized enough and there was no need for the expanded program.
The agreement, intended to limit exposure to exchange rate fluctuations, was expanded from $13 billion to $70 billion last October as the eurozone’s sovereign debt woes continued to cast a shadow over the global economy.
The arrangement has ensured that Seoul had access to sufficient dollar funds to withstand market instability. Under the swap accord, one country can obtain dollars by giving its currency to the other.
Jojima said the swap deal contributed to stabilizing the financial markets not only bilaterally but for the entire region.
On the euro crisis, the new finance minister said “there still are uncertainties” but “the issue has made progress forward.”
Speculation has been rife that Japan and South Korea would not extend the swap exchange, with Seoul not filing a formal request to renew the deal.
Diet members had also urged the government not to extend the agreement following Lee’s contentious visit to the Takeshima islets, which are known as Dokdo in South Korea.
Japan has claimed the islets are an inherent part of its territory, but they have been under South Korean control since shortly after World War II.
Jojima said the termination of the swap exchange was coordinated “through a variety of channels” with South Korea. Although he revealed that he will hold a bilateral meeting with his South Korean counterpart Thursday in Tokyo, the swap deal will not likely be discussed any further.
Tuesday’s move will bring down the size of the swap arrangements to $13 billion. Although no currency swaps have occurred since the original accord took effect in 2005, pundits warn market players could see the latest move as one less safety net for the South Korean won in the event of global economic volatility.