USD 57 Billion Supplementary Tranche Will Be Extended…If South Korea Wants

The following grows out of my end of a conversation that I had with Mark Manyin after his Hitachi-CFR Fellow talk today. (It was a useful talk, and the gist of it should show up on the CFR website and elsewhere.) A bit of advocacy crept in, but I like to think that it’s mostly analytical, descriptive and even predictive, not prescriptive.

There’s some media chatter around the possibility of Japan refusing to extend the one-year expansion of the Japan-South Korea swap arrangement from USD 13 billion to USD 70 billion in retaliation for President Lee Myung-bak making landfall at Takeshima and his subsequent statement about the Japanese Emperor having to go visit graves and apologize from the heart if he wants to visit South Korea.

Don’t even think about it. It’s bigger than Japan and South Korea. The Ching Mai Initiative was essentially about China and Japan bringing their foreign currency reserves to the service of the rest of the East Asian states.* Try to imagine what kind of message the Japanese Government would be sending to the rest of the world, the Southeast Asian members of the Chiang Mai initiative in particular, if it decided to use it for unrelated political purposes. Try to imagine how Beijing could use that for propaganda purposes against Japan, or, worse, dabble in the dark arts themselves.

Not that it’s sure to happen. The South Korean Government might decide to discontinue for political show. I can see the logic; its political leaders might not want to be seen by their domestic constituency in a supplicating position when the bilateral political relationship is at a historical low. I hope they do; the global community needs the message that Japan and South Korea can put the interests of the global financial system above the political demands of a dispute over the Liancourt Rocks. Japan and South Korea also benefit by establishing a baseline where administrative needs will be met even as political exigencies evoke verbal fuselage. If the trilateral FTA talks can go on, so can the USD 57 extension. And everyone will be enriched, at no immediate cost to any of the players.

* South Korea also has a meaningful role as a supplier, but its potential is inherently limited. It has only one-third as many residents as Japan does and has an eerily similar demographics (its surfeit of males excepted) and has one fairly recent currency meltdown in its records.

ADD: Whoa! I don’t think that they’re going to ask for an extension IYKWIM.