Singapore and Japan renewed an agreement yesterday that allows the two countries to swap their own currencies in exchange for United States dollars in times of need.

The Bilateral Swap Arrangement (BSA) between the central banks of the two nations also enables Singapore to obtain Japanese yen to meet possible fund requirements, the Monetary Authority of Singapore (MAS) and the Bank of Japan said in a statement.

At the onset of the coronavirus pandemic last year, the US dollar became scarce - bringing transactions in the global financial system to a virtual halt.

Such temporary shortages have also marked previous episodes of instability, as the uncertainty tempts investors to hold US dollars, which dominate global trade.

Eventually, the US Federal Reserve did step in to provide the much-needed currency.

However, central banks in Asia - and elsewhere - have been building up their own back-up arrangements such as currency swaps.

Singapore inked its first currency swap deal with Japan in 2003.

This was upgraded to a two-way bilateral swap arrangement in 2005, under which both countries' currencies can be exchanged for the greenback.

This is the third renewal of the swap arrangement.

Under the terms of the BSA, Singapore can swap local dollars for up to US$3 billion or its equivalent in Japanese yen from Japan.

Japan can swap Japanese yen for up to US$1 billion from Singapore.

The MAS said the size of the arrangement remains unchanged.

However, the current renewal incorporates amendments to align it with recent amendments to the Chiang Mai Initiative Multilateralisation (CMIM) agreement, including the increase in the International Monetary Fund (IMF) delinked portion from 30 per cent to 40 per cent.

The delinked portion is the amount each member may request from the CMIM when there is no IMF-backed programme in place.

The CMIM, which came into effect in 2010, is a multilateral currency swap arrangement for liquidity support among the Asean states - plus China, Japan and South Korea - established at US$120 billion.

The dual aim of the CMIM is to address balance of payment and short-term liquidity difficulties of the Asean+3 members, and supplement existing international financial arrangements, such those with the IMF.