Compiled from news reports
Japan threatened to take retaliatory economic measures against Korea, following President Lee Myung-bak’s unprecedented visit to Dokdo on Aug. 10. Lee made a surprise visit to the country’s easternmost islets, becoming the first Korean head of state to set foot on Dokdo. Japan has long laid claims to the islets.
Korea, however, remained calm, saying that even if Japan takes such steps, the country has enough economic strength and capability to withstand them.
As to reports that Japan is considering adjusting terms of a $70 billion currency swap with Korea, analysts said a possible end to the currency swap with Tokyo is not likely to have a significant impact on the local financial market as Seoul has made efforts to strengthen its safety net to absorb unexpected external shocks.
Korea expanded its currency swap line with Japan from $13 billion to $70 billion last year, but Seoul has not tapped the facility so far.
The analysts noted that Korea's foreign reserves totaled $314.4 billion as of the end of July, the seventh largest in the world.
Given the size of the country’s short-term debt and foreign reserves, its impact on the local financial markets is expected to be limited, said Kang Pan-seok, a currency analyst at Woori Futures.
Regarding Japan's potential plan not to buy Korean government bonds, market watchers and the Financial Supervisory Service, the country’s financial watchdog, said the move was unlikely to affect Seoul’s bond markets, given that the Japanese government has not bought any so far.
"The amount of Japan's investment (in Korean government debt) is marginal,” a market watcher said.
Japanese financial firms' holdings of Korean bonds stood at 505 billion won ($444.5 million), accounting for about 0.6 percent of foreigners' total stake in Korean debt, according to the watchdog.
Some analysts even welcomed Japan's move as it could ease downward pressure on market rates, given that a buying spree of local bonds by foreigners has sharply driven down interest rates.
Korea has made a cool-headed response to the reinforced Japanese move to lay claim to Dokdo, saying that it does not want to be mired in a ploy by Tokyo to make Dokdo a disputed territory.
On Tuesday, Seoul dismissed Tokyo’s proposal to jointly refer the issue of Dokdo to the International Court of Justice (ICJ), saying the proposal was "not worth consideration."