Korea japan national swap deal
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Transcript of Korea japan national swap deal
Swap deal betweenKorea and JapanSEOKBONG (GREGORY) CHOI
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
Historical ContextThe relationship among these countries is very old – more than 2,000 years
The economy relationship is as complicated as the politicalRelationship
They are compete with one another.At the same time, they cooperate with one another.
Before getting into the actual presentation
Countries are not regulated by SECThey don’t need to disclose specific detailsI just deduced why they did this
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
2001 2005 2008 2010 2011 2012 20130
10
20
30
40
50
60
70
80
The size of deal (Billion $)
The size of deal (Billion $)Source: Bank of Korea
The structure of the swap deal
Before 2008 Crisis
After 2008 Crisis
~2011
0 100 200 300 400 500 600 700 800
KRW-JPY Swap New Swap_x000d_(Tresury of Japan)CMIM
Why did they enter into the swap deal?• Economy relationship
• Both countries heavily rely on export
• Currency fluctuation with Quantitative Easing & Global financial crisis
• We need to view a country as “a collection of businesses”
Let’s assume that Sony PS VITA uses LG Display’s LCD
Raw Materials First film processing Second film processing
LCD Assembled PS Vita
Game Users Game Users Game Users
How much Korea relies on export in their GDP?
Source: tradingeconomics.com
JPY was getting more expensive until its Quantitative Easing
Source: XE.com
2008~2012: JPY appreciated as a result of the investors seeking safer assets
2012~: Abenomics. Aggressive Quantitative EasingWhen Swap Deal topped
Why they increased the swap dealwhen JPY was strongest?
Who won this deal?
Used expensive JPY at an affordable priceBy selling JPY, procured USD at an affordable price
Didn’t lose the biggest buyer as JPY increased(Otherwise, Korea could have searched for other sellers)Strengthened the economy cooperation to compete with China
Win
Win
Korea Yearly Trade Deficit against Japan
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011(1~11)
05
10152025303540
Trade Deficit ($billion)
Source: Korea Trade Association
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
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
How it ended (2)Economical reasons
Political reasons
As a result of QE, JPY got cheaper. There is no reason to offer discountKorea diversified its procurement lines from China (Less dependent on Japan)
Miss Park hates Prime Minister Shinjo Abe
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 usedthe swap instead of devaluing CNY?
Greece is a structural problem. However, if they had used the swap deal, theycould have alleviated the debt burden. They had enough(Not enough but modest) Euro.They didn’t have enough dollars, which caused a financial crisis.
Q&A