South Korea and Japan agreed to expand their currency swap arrangements more than five-fold on Wednesday to the equivalent of $70 billion, saying strong pre-emptive arrangements were needed in the face of escalating global economic uncertainty.
The agreement was reached during a summit between Japanese Prime Minister Yoshihiko Noda and South Korean President Lee Myung-bak, who also urged his counterpart to make greater efforts to resolve issues dating back to its colonial rule of the Korean peninsula.
News of the currency swap deal surprised some traders who had been bearish on the won and drove the currency to a one-month high against the dollar as the agreement gives South Korea more firepower to defend its highly vulnerable currency.
The two countries agreed to open a new dollar-local currency swap arrangement worth the equivalent of $30 billion and to expand an existing bilateral yen-won arrangement to $30 billion from $3 billion.
The agreement will increase their total swap arrangements to $70 billion from $13 billion, including a $10 billion swap arrangement under a $120 billion emergency financing plan set up among 13 East Asian countries.
"We agreed to implement the South Korea-Japan currency swap line of $70 billion, sharing the view that it's important to enhance financial and currency co-operation to pre-emptively stabilise the financial markets amid escalating global economic uncertainties," Lee told a joint news conference in Seoul.