South Korea and Japan agreed on Tuesday not to extend the bilateral currency swap arrangement, reducing the deal between the two countries to the pre-crisis level of 13 billion US dollars.

According to a joint statement by the Ministry of Strategy and Finance and Bank of Korea (BOK), the authorities agreed in coordination with their Japanese counterparts on the expiration of the temporary expansion of currency swap arrangement as of Oct. 31, as scheduled.

A year earlier, South Korea expanded their currency swap arrangement with Japan from 13 billion dollars to 70 billion dollars in a bid to better respond to the external risks such as the European fiscal crisis and the sovereign rating downgrade of the United States.

Under the deal, the BOK and the Bank of Japan (BOJ) expanded their won-yen swap agreement from 3 billion dollars to 30 billion dollars, while the BOK and the Ministry of Finance of Japan established a new dollar-local currency swap arrangement of 30 billion dollars in addition to the bilateral swap deal of 10 billion dollars under the Chiang Mai Initiative (CMI).

With the closing of the temporary swap expansion arrangement as scheduled, the swap volume between the two countries will be reduced from 70 billion dollars to 13 billion dollars.

The finance ministry and the central bank in Seoul stressed in the joint statement that there was no need to extend the swap deal with Japan, citing upgraded sovereign rating, improved external soundness and stable financial markets.

South Korea's foreign reserves hit a new high of 322 billion U. S. dollars as of the end of September, and the current account surplus reached 22.3 billion dollars for the first eight months of this year.

Following the sovereign rating upgrades by major global credit rating agencies, including Moody's, S&P and Fitch, the cost of insuring South Korea's sovereign debts from default dropped to 83 basis points (bps) as of last Friday from 137 bps at the end of October 2011.

A senior finance ministry official Choi Jong-ku told reporters that South Korea did not ask Japan to extend their swap deal, saying that the decision was made based solely on economic considerations rather than diplomatic ones.

Diplomatic tensions between the two nations mounted following South Korean President Lee Myung-bak's visit to the easternmost islets of Dokdo in mid-August. After the unprecedented visit, Japanese Finance Minister Jun Azumi said that Japan may scale back its currency swap deal with South Korea.

"Given the stable financial markets and the sound macroeconomic conditions of both countries, they concluded that the extension of the increase of the bilateral swap arrangements is unnecessary," the joint statement said.

The statement also noted that both countries will cooperate in an appropriate manner as the need arises, saying that they will closely monitor the global economic conditions as well as those of both countries.