The government on Thursday denied Japanese media reports that Tokyo could suspend a currency swap agreement with Seoul signed to stabilize their foreign exchange markets in times of economic volatility.

"I think the report is speculative. I have yet to hear such a thing," said a high-ranking Cheong Wa Dae official. And a senior official at the Ministry of Strategy and Finance said, "We have had diplomatic clashes with Japan before, but they have never escalated into an economic dispute."

Bilateral ties have soured since President Lee Myung-bak last Friday visited Dokdo, to which Japan maintains a dubious claim. It was the first time a Korean president has visited the islets. On Tuesday, Lee further incensed Tokyo by saying the Japanese emperor should sincerely apologize for Japan’s brutal occupation of Korea from 1910 to 1945 if he wants to visit Seoul.

That drew strongly-worded responses from Japanese officials, and Osamu Fujimura, Japan's chief cabinet secretary, apparently told Japanese reporters on Wednesday that the suspension of the currency swap contract cannot be ruled out.

But foreign exchange authorities believe that would deal no severe blow to the markets. They say that the exchange market has stabilized significantly since 2008, when the swap agreement was increased.  

In fact, markets were calm when the US$30 billion currency swap agreement Seoul signed with Washington expired in February 2010 and when the swap agreement with Tokyo was reduced in April the same year. At present, Korea's available foreign exchange reserves stand at $408.7 billion even without the swap agreement with Japan, according to the Ministry of Strategy and Finance.

Some officials here were nonetheless upset at the reports that Japan could use the agreement as a political tool, considering how enthusiastic Tokyo was when the swap agreement was raised from $13 billion to $70 billion in October last year.

"At that time, Japan was suffering from a persistently strong yen, so it was seeking to weaken its value against the U.S. dollar by pumping it out to foreign markets," said one foreign exchange official here.