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(EDITORIAL from The Korea Times on Aug. 30)

All Headlines 07:00 August 30, 2016

Currency swap with Japan
Time for neighbors to enhance policy coordination

Korea and Japan have agreed to begin talks on resuming their currency swap deal. During his talks with Japanese Finance Minister Taro Aso in Seoul on Saturday, Strategy and Finance Minister Yoo Il-ho proposed signing a new swap arrangement as a token of cooperation, and Japan agreed.

Under the deal, one nation can obtain U.S. dollars by giving its currency to the other. It will take months before the neighboring countries sign the proposed deal.

The agreement is a step in the right direction, given that it can serve as another safety net for financial stability at a time when the United States is hinting at the likely possibility of hiking its interest rate. Escalating global economic uncertainties, such as Brexit, also underscore the importance of such cooperative measures.

Before the meeting, Seoul's finance ministry said the currency swap was not included on the agenda. But the issue came to the fore as Yoo offered to have talks during the meeting after U.S. Federal Reserve Chair Janet Yellen told a global monetary policy conference that the case for a rate increase had grown stronger. If the U.S. opts for a rate hike, foreign capital might leave emerging economies such as Korea in droves, pushing them to a possible financial meltdown.

The currency swap between Seoul and Tokyo began in 2001 with $2 billion. At its peak, the deal expanded to $70 billion in 2011. The amount of currency being swapped shrank after former President Lee Myung-bak visited the easternmost islets of Dokdo in 2012, and the deal expired in February last year.

Certainly, the currency swap is mutually beneficial. Seoul can step up its efforts to brace for another emergency situation, while Tokyo can use the swap deal to lift the international prestige of its currency. So there is no question that last year's closure of the then currency swap set a bad precedent for undermining mutual interests by confusing politics with economic matters.

In fact, doubts have arisen over the necessity of a fresh currency swap with Japan at a time when Korea has enough foreign exchange reserves ― $371 billion at the end of July _ and its current account balance has been in the black for more than three years.

But the Korean government is right to seek to sign currency swap deals as many as possible, taking into account the expanded volatility in global financial markets and the possibly sudden exit of foreign funds. This is no time for complacency even if one doesn't expect external shocks immediately.

The latest agreement on the currency swap talks comes as diplomatic tensions between the two countries have eased following progress on the so-called sex slavery issue in December. One can have premature hopes that their relations will get back on track after going through a turbulent time.

Turns and twists associated with their currency swaps are a reminder that Seoul and Tokyo should establish a principle that politics and economic matters should be separated for mutual benefit. It is crucial for them to enhance policy coordination to cope with mounting global uncertainties.
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