The original swap pact expires this week. Under the new deal, Japan would swap up to $3 billion for Singapore dollars in case of balance of payment problems or short-term liquidity shortages in Singapore, the sources told Reuters.
What is new is that Singapore will be expected to commit to swap up to $1 billion for yen if Japan faces similar problems, making the new facility $4 billion in total.
That makes it a two-way pact, replacing the one-way deal under which Japan pledged to help Singapore prevent any financial crisis, the sources said.
It is the first time Singapore has set up a swap deal under the so-called Chiang Mai Initiative (CMI), in which it is regarded as a creditor nation. Currently, Japan and Singapore have a $1 billion currency swap facility.
The CMI was launched by the Asean+3 group in 2000 to create a regional web of bilateral currency swap lines to give Asian countries extra firepower in case they came under speculative attacks in currency markets.
Japan, the key driver behind creating a network of bilateral swap agreements, has such pacts with five Asean countries and China and South Korea. But Singapore, which has often been seen as a less eager participant, has a swap line with Japan under the CMI.
"It means a lot for Singapore to start being a creditor nation" in the framework, a source close to the deal said.
Another source involved in the negotiations said that as part of the new pact, Japan and Singapore will enhance economic surveillance, which helps early detection of irregular movements in financial markets. Central bank officials from both countries will sign the deal on the sidelines of a session of EMEAP (Executives' Meeting of East Asia and Pacific Central Banks) in Frankfurt later on Tuesday, the sources said.