South Korea and Japan have agreed to reduce the size of their currency swap arrangement, amid a long-standing dispute over a group of islands.

The two Asian powers cited improved financial market stability in announcing they will allow the temporary expansion of the deal to expire at the end of the month, as scheduled.

South Korea's Central Bank says the currency swap deal will now return to $13 billion, down from $70 billion. It was expanded last year to help South Korea protect its currency from the international financial crisis.

The feud over a rocky archipelago, known as Dokdo in Seoul and Takeshima in Tokyo, worsened after South Korean President Lee Myung-bak visited one of the islands in August.

The dispute has since threatened to damage economic trade ties between Japan – Asia's second largest economy – and South Korea, the region's fourth biggest.

Japanese Finance Minister Koriki Jojima said Tuesday the currency swap decision was “not a political decision,” saying it “purely took into account economic and financial factors.” He said the move will not affect any further cooperation with South Korea, if needed.

The ministry said in a statement that both sides have concluded they do not need to extend the agreement because of the “stability in the markets of both countries and sound microeconomic conditions.”

The Bank of Korea said in a separate statement that it reflects Seoul's “improved resilience to external shocks.”

South Korea has rejected Japan's proposal to bring the island dispute to the International Court of Justice. The largely uninhabited islands have been under effective South Korean control since the end of Japanese colonial rule after World War Two.