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ndonesia is seeking a bilateral currency swap arrangement (BCSA) with Japan, similar to the one with China, to help it further ease the volatility of the rupiah against the US dollar, according to the central bank.

The proposed arrangement may reach 1 trillion yen (about US$10.63 billion), Bank Indonesia (BI) deputy governor Hartadi A. Sarwono said Friday.

"It is being negotiated," he said. "At the last ADB's meeting in Denpasar, Japan expressed willingness to provide 6 trillion yen to facilitate bilateral trade with ASEAN (countries) in the form of a BCSA."

He added that ASEAN countries were studying the proposed arrangement. ASEAN includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

Indonesia has a similar arrangement with China worth Rp 175 trillion or 100 billion yuan (about $15 billion), signed in March.

Such arrangements mean that traders can do export-import transactions between the two respective countries without using the US dollar and use their respective currencies instead, easing the volatility of the rupiah against the American greenback, said Hartadi.

According to the Central Statistics Agency (BPS), Indonesia exported $2.4 billion of non-oil-and-gas products to Japan between January and March, while importing $698.3 million of Japanese products. Japan is Indonesia's largest importer.

Aside from the proposed arrangement, Indonesia and Japan have also inked a bilateral swap arrangement (BSA) worth $12 billion, under the Chiang Mai Initiative Multilateralization (CMIM) -- but this is more intended to strengthen foreign exchange reserves.

As of April 30, Indonesia's forex reserves stood at $56.57 billion, according to BI.

On Friday, the rupiah advanced almost 2 percent this week to 10,238 per dollar at 4:24 p.m. in Jakarta, Bloomberg reported. So far in the second quarter of 2009, the rupiah was the biggest winner among Asia's 10 most-traded currencies.

"The amount (1 trillion yen) is quite significant. It (the proposed arrangement) will reduce volatility of the rupiah (against the dollar)," said Purbaya Yudhi Sadewa, Danareksa Research Institute's chief researcher.

"In the short term (the proposed arrangement) may boost market sentiment, while in the long term it may benefit the real sector, as the procedures will take time before becoming effective," he said.

By the year's end, the rupiah may hover between 9,500 and 10,000, reaching the currency's new equilibrium level, he added.

Foreign investors have returned to Indonesia as the country managed to score positive growth at a time when other countries are suffering from recession due to the global economic downturn.

Indonesia had 4.4 percent growth in the first quarter of 2009 from a year earlier, sustained by the still-robust domestic consumption, according to BPS.

The Jakarta Composite Index gained 7.5 percent this week, with overseas investors buying $43 million more Indonesian equities than they sold, according to the Indonesian Stock Exchange (IX), as reported by Bloomberg.