Korea japan national swap deal

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Swap deal between Korea and Japan SEOKBONG (GREGORY) CHOI

Transcript of Korea japan national swap deal

Page 1: Korea japan national swap deal

Swap deal betweenKorea and JapanSEOKBONG (GREGORY) CHOI

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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

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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.

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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

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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

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The size of deal (Billion $)

The size of deal (Billion $)Source: Bank of Korea

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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

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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”

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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

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How much Korea relies on export in their GDP?

Source: tradingeconomics.com

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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?

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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

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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

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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

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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

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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

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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.

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Q&A