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(News Focus) Rising uncertainties urge S. Korea to resume currency swap with Japan

All Headlines 19:53 August 27, 2016

By Kim Boram

SEOUL, Aug. 27 (Yonhap) -- The agreement between South Korea and Japan's finance ministers to start talks on resuming a currency swap deal, which expired early last year, is expected to help Seoul secure another safety net in the face of rising financial uncertainties stemming from a possible U.S. rate hike, analysts said Saturday.

At the seventh Seoul-Tokyo finance ministers' meeting held in Seoul, South Korea's Yoo Il-ho proposed the resumption of the arrangement, citing the symbolic meaning of the bilateral economic cooperation.

A currency swap is an arrangement between two countries to exchange one currency for another at a specific rate in a bid to use the powerful foreign currency to soothe volatility in the currency market.

In February last year, Seoul and Tokyo agreed to end the US$10 billion bilateral currency swap agreement that had been maintained since 2001, saying that the economic situation surrounding the two neighboring countries was stable enough.

But some pointed out that political and diplomatic tensions over historical issues affected the decision to cease the 14-year long deal, although the two sides refuted such an argument.

Just one and half years later, the two countries decided to open negotiations to resume the arrangement, as the U.S. Federal Reserve has been giving out a series of hints that it may raise the key rate in the near future, adding that the world's largest economy has improved economic data.

Analysts said that it is the right time to discuss the resumption of the won-yen swap as such intensifying external downside risks will fuel volatility in the local financial market, where about one third of market capitalization is held by foreign investors.

They noted that a sudden foreign outflow from the South Korean financial market would lead to a financial crisis and pull down the real economic growth.

"We need to prepare for heightened financial volatility sparked by a U.S. rate hike," said Sung Tae-yoon, a professor at Yonsei University. "The Japanese yen is a strong currency in the world market. The won-yen swap will help increase the stability of the South Korean currency."

In the aftermath of the 2008 global financial crisis, South Korea decided to set up a network of currency swap deals as a financial safety net for a potential financial turmoil, starting from one with the United States.

"When many countries reach swap deals with as many countries as possible, it will help ease uncertainties in the global economy. That's an important policy of the South Korean government," said Finance Minister Yoo.

Currently, it has a couple of currency swap arrangements with countries including China, Malaysia and the United Arab Emirates.

Earlier, Seoul and Beijing agreed to extend their currency swap deal, worth 64 trillion won ($57.4 billion), which was scheduled to expire next year.


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