This is about the swap deal that Korea and Japan entered into. The swap deal was terminated as of 2015. I hope both countries to enter into the swap deal again in order to reinvigorate the economic relationship between them.

1. Swap deal between
Korea and Japan
SEOKBONG (GREGORY) CHOI

2. Index
Introduction of government swap deal
The structure of swap deal
Why did they enter into swap contract? Who won?
Relevant risks
How do we apply this
Q&A

3. Historical Context
The relationship among these countries is very old –
more than 2,000 years
The economy relationship is as complicated as the political
Relationship
They are compete with one another.
At the same time, they cooperate with one another.

4. Before getting into the actual
presentation
Countries are not regulated by SEC
They don’t need to disclose specific details
I just deduced why they did this

5. The size of swap deal – notional amount
In 2001, both countries entered
into the swap deal first.
In 2008, both countries agree to
expand the swap deal to stabilize
the both country’s currency
In 2011, right before Japan’s QE
the size of deal topped $70
billion.
In 2015, this swap deal ended
0
10
20
30
40
50
60
70
80
2001 2005 2008 2010 2011 2012 2013
The size of deal (Billion $)
The size of deal (Billion $)
Source: Bank of Korea

6. The structure of the swap deal
0 100 200 300 400 500 600 700 800
Before 2008 Crisis
After 2008 Crisis
~2011
KRW-JPY Swap New Swap
(Tresury of Japan)
CMIM

7. Why did they enter into the swap deal?
• Economy relationship
• Both countries heavily rely on export
• Currency fluctuation with Quantitative Easing & Global financial crisis
• We need to view a country as “a collection of businesses”

8. Let’s assume that Sony PS VITA uses LG
Display’s LCD
Raw Materials First film processing
Second film
processing
LCD Assembled PS Vita
Game Users Game Users Game Users

9. How much Korea relies on export in their
GDP?
Source: tradingeconomics.com

10. JPY was getting more expensive until its
Quantitative Easing
Source: XE.com
2008~2012: JPY appreciated as a result of the investors
seeking safer assets
2012~: Abenomics. Aggressive Quantitative Easing
When Swap Deal topped
Why they increased the swap deal
when JPY was strongest?

11. Who won this deal?
Used expensive JPY at an affordable price
By selling JPY, procured USD at an affordable price
Didn’t lose the biggest buyer as JPY increased
(Otherwise, Korea could have searched for other sellers)
Strengthened the economy cooperation to compete with China

12. Korea Yearly Trade Deficit against Japan
0
5
10
15
20
25
30
35
40
Trade Deficit ($billion)
Source: Korea Trade Association

13. Relevant Risks?
 The abrupt change in currency as a result of external shock
 Between 2008-2010, amid the crisis, JPY appreciated radically, while KRW depreciated dramatically
 As opposed to the first expectation, what if it ended up with win-lose situation?
 As a result of the sudden appreciation of JPY, the automakers were hit by this (TOYOTA, HONDA)
Sales of Honda

14. How it ended (1)
 This agreement came to an end in Feb 2015.
http://www.wsj.com/articles/japan-south-korea-to-let-currency-swap-program-expire-
1424088419

15. How it ended (2)
Economical reasons
Political reasons
As a result of QE, JPY got cheaper. There is no reason to offer discount
Korea diversified its procurement lines from China (Less dependent on Japan)
Miss Park hates Prime Minister Shinjo Abe

16. How do we apply this to other cases?
U.S. doesn’t enter into the swap deal usually. However…
Several months ago, China devalued their currency (CNY). What if they had used
the swap instead of devaluing CNY?
Greece is a structural problem. However, if they had used the swap deal, they
could have alleviated the debt burden. They had enough(Not enough but modest) Euro.
They didn’t have enough dollars, which caused a financial crisis.

17. Q&A