South Korea has decided against renewing its extended currency swap deal with Japan expiring this month, the Finance Ministry said Tuesday.
The ministry said South Korea's capacity to deal with external risks has improved and the overall financial market conditions have been stabilizing, Yonhap News agency said.
The issue relates to an agreement the two countries signed a year ago to expand their swap arrangement to $70 billion from $13 billion for one year expiring Oct. 31. The swap allows South Korea to exchange its currency for yen or U.S. dollars during market volatility.
Relations between the two countries have been strained over a group of Korean-controlled islands that lie between the two countries, which Japan also claims. They are called Dokdo in South Korea and Takeshima in Japan. The dispute gained momentum after South Korean President Lee Myung Bak visited one of the islets last August over strong Japanese protest.
Lee also reportedly called for an apology from Emperor Akihito for Japan's 1910-1945 colonial rule of the Korean Peninsula.
Japan also had been considering whether to continue with the expanded currency swap agreement as it waited for Seoul's response.
The latest decision from South Korea would bring the bilateral swap volume back to $13 billion.
South Korea has already rejected Japan's proposal to go to the international court for resolution of dispute, saying it was not worth considering.
Japan has a similar territorial dispute with China over a group of islands in the East China Sea, which has become quite tense since Japan nationalized the islands last month.