Japan is striking back in a territorial dispute with South Korea by threatening to reduce a financial supply line to its neighbor.
It is also preparing to ask the International Court of Justice to rule on sovereignty of the Takeshima islets, which are called Dokdo by South Korea, and are administered by Seoul.
President Lee Myung-bak visited the islets on Aug. 10, a move which Japan saw as an untimely snub.
Some financial cooperation "could be put back to the drawing board," Japanese Finance Minister Jun Azumi said on Aug. 17.
At stake is an enlarged foreign-exchange swap agreement, which the two countries expanded from $13 billion to $70 billion (1.03 trillion yen to 5.56 trillion yen) in October 2011.
The swap aims to provide liquidity if either nation faces a shortage of funds. It was agreed at a time when the South Korean won was suffering turmoil from the euro zone debt crisis.
Seoul welcomed the swap expansion, and it helped to stem the won's fall.
But the enlarged swap expires in October this year unless both sides agree to renew it.
On Aug. 10, Lee became the first-ever South Korean leader to set foot on Takeshima. The visit caused additional distress in Tokyo because it was taken to be a reversal of recent efforts to improve relations.
"It is highly regrettable," Prime Minister Yoshihiko Noda said at a news conference after Lee's visit. "Japan and South Korea have endeavored to build future-oriented relations."
Aides said the prime minister felt betrayed by the act, and on Aug. 14 Lee caused further distress when he demanded an apology from Emperor Akihito for those killed during Japan's colonization of the Korean peninsula from 1910-1945. Akihito acceded the throne in 1989.
On Aug. 15, Japan's finance minister discussed responses with the foreign minister, Koichiro Genba. Among the cards that could be played, the swap deal seemed a strong one. And Azumi obtained approval from Noda later to cancel a scheduled trip to Seoul for finance talks.
"(South Korean President Lee Myung-bak's) remarks and actions deviate from diplomatic courtesy and cannot be dismissed. The expansion of the swap could be put back to the drawing board," Azumi said on Aug. 17.
But officials at the Finance Ministry's international affairs section expressed concern that rising tensions could have an unwanted impact in the wider region.
The currency swap was inaugurated in 2001 as part of a pool of foreign-currency reserves known as the Chiang Mai Initiative Multilateralization agreement. That scheme was intended to help financially troubled East and Southeast Asian nations.
Through it, the officials say, restricted cooperation between Japan and South Korea could affect other countries too.
As for South Korea, a shrunken foreign-currency reserve pool could make the won more susceptible to turmoil from Europe. In such a climate, investors tend to dump the currencies of smaller economies.
South Korea is shrugging off the threat. A senior official in the office of the South Korean president presented an upbeat assessment of the nation's economy to reporters on Aug. 16, citing sufficient foreign-currency reserves.
But a day later the won fell against the yen on the Tokyo foreign-exchange market.
Officials in Seoul are questioning Tokyo's judgment. Japan itself benefits from a stable won, and Tokyo could be accused of destabilizing the economic environment for third-party nations.
"We won't prejudge developments," said a spokesman with South Korea's Ministry of Strategy and Finance. "We'll wait and see."
Meanwhile, Japan's foreign ministry too is ratcheting up the pressure on Seoul. On Aug. 17, Genba summoned Shin Kak-soo, South Korea's ambassador to Japan, and delivered a strongly worded protest.
Foreign ministry officials say they will pull no punches in responding. Already they have taken one major step.
On the day following Lee's visit, Genba said Japan might refer Takeshima sovereignty to the International Court of Justice in The Hague; on Aug. 17, a decision to do so was announced by Osamu Fujimura, chief Cabinet secretary.
The court will convene a tribunal only if both complainants agree. So Japan's foreign ministry is currently drafting a request, to be delivered to the South Koreans next week. The foreign ministry does not plan to reveal the full text of that letter.
Ministry officials are confident that the tribunal would underscore Japan's core territorial claims in the eyes of the international community.
If Seoul refuses, Japan could refer the Takeshima dispute to the ICJ unilaterally. In that case, a senior ministry official said, South Korea would face questions from other nations over its refusal.
Furthermore, Japan could cite a 1965 relations-normalization agreement with South Korea. That document says if disputes cannot be solved through diplomacy, they should be referred to arbitration.
Fujimura said the agreement entitles Japan to seek arbitration. "Both sides are aware that Takeshima is in dispute," he said.
Genba said ultimately it is in South Korea's own interests to have a court adjudicate.
"If South Korea argues its sovereignty claim over the islets is legitimate, it should comply with Japan's proposal to settle the case at the ICJ," he said.
The government will convene a ministerial meeting on Aug. 21 to examine options.
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