South Korea and Japan are expected to decide next week on whether to extend their US$10 billion currency swap line, sources said Friday.

Financial and government sources said bilateral talks are underway on the existing swap arrangement that expires on Feb. 23.

The swap line is a Korean won-to-U.S. dollar and Japanese yen-to-U.S. dollar arrangement and has been set up as part of the Chiang Mai Initiative to better insulate the countries in the event of external shock. Under the deal, each side can exchange their own currency for $10 billion at a fixed exchange and interest rate, which can come in handy in times of global financial crisis.

The $10 billion swap is the last of a series of arrangements between the two neighbors since July 2001 that reached as high as $70 billion in 2011. It was then scaled back following the deterioration of bilateral relations over Japan's efforts to whitewash its history and its territorial claims on the Dokdo islets in the East Sea. South Korea effectively controls the islets.

The swap line stood at $13 billion as of 2012 but was cut by $300 million the following year. If the line is not extended this time, the two countries will no longer have a bilateral currency swap system in place.

Other multilateral swaps involving the two countries will not be affected even if the exchange system is not extended.

A finance ministry official said there is still time to discuss the matter.

"It may not be until the very end before the fate of the swap line is decided," he said.

Others sources said that negotiations will center on such matters as financial market stability, the need for close cooperation and political and diplomatic considerations. (Yonhap)