South Korea and Japan agreed to end the bilateral currency swap agreement that has been maintained since 2001, the finance ministry said Monday.

According to the Ministry of Strategy and Finance, the US$10 billion swap arrangement between the Bank of Korea and the Bank of Japan will not be renewed after it expires on Feb. 23.

"It has been agreed by both sides after wide-ranging talks that in light of financial and economic circumstances, it may be appropriate to allow the pact to expire naturally," Min Kyung-seol, head of the ministry's financial cooperation division, told reporters in a briefing.

He pointed out that while there are both pros and cons to holding onto a swap arrangement, South Korea possessed strong economic fundamentals propped up by a large foreign currency reserve. The country reported close to $90 billion in current account surplus last year.

"Throughout the time that the swap arrangement existed, it was never once used," the official stressed.

The current swap deal allows a country to use its respective currency to get U.S. dollars from the other side at a pre-determined rate, which can come in handy in an emergency. At one point, the size of South Korea-Japan swap arrangement grew to $70 billion before Japan's territorial provocations and whitewashing of its colonial and wartime atrocities against Korea strained bilateral ties. 

South Korean President Park Geun-hye has yet to hold a bilateral summit with her Japanese counterpart, Shinzo Abe, after taking office in February 2013.

Min declined to elaborate on speculation that political considerations or pride had a part in the expiration of the arrangement that was initially set up to expand financial cooperation between the two sides.

He, however, said that if one side pushed for the extension of the swap deal too strongly, this in itself could send the wrong signal to the market that the country may be in trouble.

The ministry said that despite the decision not to extend the pact, the finance ministries and central banks of the two countries concurred on the need to cooperate closely in an appropriate manner as the need arises.

It said South Korean Finance Minister Choi Kyung-hwan will hold formal bilateral talks with his Japanese counterpart, Taro Aso, on May 23 in Tokyo.

This will mark the first time since November 2012 that the finance ministers of the two countries will meet in a bilateral framework.

Previous annual finance ministerial talks allowed the two sides to discuss outstanding issues. The last of what had been annual meetings took place in South Korea.

"The talks will permit both sides to deliberate on issues facing the two countries and the latest international developments," a ministry official said. He said a new swap arrangement can be touched on at the talks, although it is unlikely right after the current scheme was allowed to expire.

He added that despite some media reports, South Korea is not engaged in any detailed talks to arrange bilateral currency swaps with countries such as the United States, Britain and Canada.

Market watchers did not expect any impact on the Treasurys sector from the swap expiration.

"There is no risk of outflow of capital from the expiration of the swap scheme, especially since current trends point toward more funding entering the bond market," a bond market insider said. (Yonhap)