Japan Extends Currency Swap Deals with Indonesia, the Philippines and Singapore

Dec. 20 – Japan extended currency swap agreements with the Philippines and Indonesia this month as the region prepares for potential currency outflows in the wake of tapering by the U.S. Federal Reserve of its quantitative easing program. Japan also reinstated a currency swap deal with Singapore, which previously expired two years ago.

Under the agreements, Japan will increase the yen’s availability in Indonesia from US$12 billion to nearly US$23 billion and will double its availability in the Philippines from US$6 billion to US$12 billion. The currency swap deal with Singapore will renew the previous agreement of US$4 billion.

These currency swaps are designed to provide foreign currency liquidity between the central banks in Japan, Indonesia, Singapore and the Philippines. Such liquidity is becoming increasingly important in the face of plans by the United States Federal Reserve to slow its US$85 billion monthly bond buying program, which could lead to a rebalancing of international currency portfolios around the world.

“For emerging markets, including Asia, the risk is that now there’s money going back to North America because things are improving there. Asia may see capital outflow in the short term,” said BNP Paribas Senior Strategist Chi Lo.

The expanded agreements are expected to soften the impact of the U.S.’s tapering plan’s, according to Japan’s Finance Ministry. “The authorities in Japan and Indonesia hope that the strengthened bilateral financial cooperation will contribute to the stability of financial markets, and further develop growing economic and trade ties,” said a statement released by the Japanese government last week.

Regional currency stability has traditionally been a key concern for Japan following the Asian Financial Crisis in 1997. After observing the rapid destabilization of several currencies in the region, the Japanese government committed to increasing foreign currency liquidity in Asia and helped establish the Chiang Mai Initiative, which facilitates currency swap agreements between countries in Asia-Pacific. Following its inception, the initiative has helped created swaps in the region worth nearly US$240 billion.

Japan also singed a currency swap deal with India yesterday, worth US$50 billion, representing a massive recommitment of currency to India. The two countries previously had a swap agreement worth US$16 billion, which was signed in December of 2012.

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