The Japan–South Korea currency swap line was first established in 2001 as part of a broader effort to stabilize financial systems and manage liquidity between the two nations. In the aftermath of the 1997 Asian financial crisis, both countries recognized the importance of regional financial cooperation to prevent future economic instability. The currency swap agreement allowed Japan and South Korea to exchange their respective currencies, ensuring access to emergency liquidity in times of need. This arrangement was critical in strengthening economic resilience and reinforcing bilateral financial ties.

The swap line’s role during the 2008 global financial crisis

The importance of the currency swap line was highlighted during the 2008 global financial crisis. As capital outflows increased and financial markets became volatile, South Korea faced significant liquidity pressures. Given Japan’s robust financial position, its support through the swap line was instrumental in stabilizing South Korea’s economy. The agreement was expanded to allow South Korea to access yen liquidity in exchange for the Korean won, which ensured confidence in the country’s financial system. This episode demonstrated the effectiveness of international financial cooperation in mitigating economic shocks and sustaining market stability.

Suspension and renewal

Despite its financial significance, the Japan–South Korea currency swap line has been subject to diplomatic tensions. In 2015, the agreement expired, reducing the swap line to zero. In 2019, Japan imposed export restrictions on critical materials essential for South Korea’s semiconductor industry, which affected South Korea’s technology sector and hindered financial collaboration. South Koreans perceived the move as retaliation for a court ruling on forced labor during Japan’s colonial rule.

This trade dispute strained bilateral relations and ultimately led the countries to suspend economic cooperation, including the swap line. The episode underscored the vulnerability of economic partnerships to political conflicts and the need for institutional mechanisms to safeguard financial cooperation from diplomatic disputes.

However, the Covid-19 pandemic in 2020 revealed the necessity of financial preparedness and cooperation. Recognizing the economic disruptions caused by the global health crisis, Japan and South Korea renewed their currency swap agreement in March 2020. This renewal was a crucial step in ensuring financial stability and maintaining liquidity access during uncertain times. Beyond economic considerations, the agreement also marked a diplomatic breakthrough, reflecting both countries’ willingness to prioritize regional economic security over political tensions.

Historical grievances, nationalism and domestic political pressures

Unresolved historical grievances have long affected bilateral relations between Japan and South Korea. Japan’s colonization of Korea from 1910 to 1945 remains a contentious issue, with disputes over forced labor, “comfort women” and territorial claims over the Dokdo/Takeshima islands still straining relations. These historical disputes frequently impact economic and diplomatic interactions, complicating cooperative efforts such as the currency swap line. The persistence of these issues has made sustained financial cooperation difficult, as political conflicts often overshadow economic necessities.

Nationalism plays a critical role in shaping Japan–South Korea relations. In South Korea, public sentiment remains highly sensitive to historical injustices, influencing policymakers to adopt hardline stances against Japan. Similarly, Japanese leaders face domestic pressures regarding historical legacy and national pride, which further complicate diplomatic engagement. These internal political dynamics frequently challenge efforts to sustain economic collaboration.

Geopolitical implications of the Japan–South Korea relationship

The Japan–South Korea relationship has broader geopolitical implications, particularly in the Asia-Pacific region. As key US allies, both countries play crucial roles in regional security dynamics, especially concerning North Korea and China’s growing influence. The United States has consistently encouraged reconciliation between Japan and South Korea, recognizing that diplomatic stability enhances regional security and economic resilience. The currency swap line, while primarily an economic tool, also serves as a barometer of bilateral relations; it reflects the complex interplay between financial cooperation, political tensions and broader geopolitical considerations.

Sustaining the swap line

The Japan–South Korea currency swap line has been a crucial instrument for financial stability and crisis management since its inception. However, its history has been shaped by cycles of cooperation and suspension, often driven by diplomatic tensions and historical disputes. The renewal of the swap line during the Covid-19 pandemic underscored both nations’ capacity to prioritize economic stability over political differences. Yet, deep-seated diplomatic and nationalistic challenges continue to hinder sustained collaboration.

To safeguard long-term financial stability and regional economic security, institutional mechanisms must be developed to shield economic cooperation from broader geopolitical conflicts. Political uncertainty escalated in 2024, notably with South Korean President Yoon Suk Yeol’s declaration of martial law after the renewal. Nevertheless, the framework for economic cooperation has remained intact. Maintaining this resilience will be essential in navigating future challenges.

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.