Updated – March 12, 2025 at 09:34 PM.
Apart from enhancing financial security, the Bilateral Swap Arrangement presents significant opportunities for economic expansion
The Bilateral Swap Arrangement holds immense importance for both Japan and India
The renewal of the Bilateral Swap Arrangement (BSA), originally established in 2008 and later expanded, now valued at up to $75 billion, marks a significant milestone in the economic partnership between Japan and India. This agreement allows both nations to swap their local currencies for US dollars, providing a critical financial safety net against potential liquidity crises and balance of payments challenges. At a time of heightened global financial volatility, this renewed arrangement underscores the deepening strategic and economic cooperation between these two Asian powerhouses.
The BSA holds immense importance for both Japan and India, primarily in terms of financial stability. It acts as a safeguard against external economic shocks such as sudden capital outflows, currency depreciation, or global financial turbulence. By securing a reliable access point to US dollars, both countries can mitigate risks associated with currency fluctuations, ensuring stability in financial markets and boosting investor confidence. This arrangement also strengthens their commitment to reducing dependency on a single currency in international trade, potentially paving the way for greater use of local currencies in bilateral transactions over time.
In the Indo-Pacific context, Japan and India share a common vision of maintaining a free and open regional order. Strengthening financial cooperation through this swap agreement enhances their ability to support each other’s economic stability, reinforcing their partnership amid global geopolitical uncertainties. Furthermore, facilitating smoother currency transactions reduces exchange rate risks, promoting greater trade and investment flows between the two economies.
Bilateral trade
In 2023, Japan exported goods worth $18.2 billion to India, whereas India’s exports to Japan stood at only $5.62 billion. This significant trade imbalance highlights the need for targeted initiatives to enhance India’s export competitiveness in the Japanese market.
Key export and import categories further illustrate this dynamic. Japan’s major exports to India include refined copper ($1.87 billion), precious metal compounds ($1.4 billion), and motor vehicle parts ($862 million). On the other hand, India’s primary exports to Japan consist of diamonds ($380 million), raw aluminium ($366 million), and crustaceans ($281 million). While Japan’s exports to India have been growing at an annualised rate of 8.64 per cent over the past five years, India’s exports to Japan have only seen a marginal increase of 0.046 per cent annually, indicating substantial room for improvement.
Foreign direct investment (FDI) plays a crucial role in Japan-India economic relations. Between 2000 and 2024, India received over $43 billion in FDI from Japan, making it India’s fifth-largest source of foreign investment. This investment is particularly concentrated in infrastructure, manufacturing, and the automotive sector, with projects such as the Dedicated Freight Corridor exemplifying the strategic nature of Japanese investment in India.
While the BSA strengthens financial security, it also presents significant opportunities for economic expansion. A major area of focus should be the diversification and enhancement of India’s export portfolio to Japan. Sectors such as information technology, pharmaceuticals, and renewable energy hold immense potential for deeper trade engagement. Additionally, leveraging the digital economy could unlock new avenues for collaboration, particularly in fintech, AI, and smart manufacturing.
While challenges such as trade imbalances persist, this agreement lays a strong foundation for future collaboration. By capitalising on emerging opportunities, especially in high-growth sectors, both nations can work towards a more resilient and integrated economic relationship.
Valiachi is an Assistant Professor at Sathyabama Institute of Science and Technology, Chennai, and Williams is the Head of India at Sernova Financial. Views are personal