Japan will send its ambassador Masatoshi Muto back to South Korea one week after recalling him, as an ongoing territorial dispute heightens between Tokyo and Seoul over sovereignty of a chain of islands in the Sea of Japan (East Sea), Chinese Foreign Minister Koichiro Gemba said on Wednesday.

The move comes just one day after Japan formally proposed to South Korea that the two countries take the territorial feud to the Hague-based International Court of Justice (ICJ) for arbitration.

Gemba told a news conference Wednesday that Ambassador Masatoshi Muto will return to Seoul later in the day to "resolve the dispute from inside South Korea." He added that Japan needed to express its unwavering position on the territorial issue from inside South Korea, Chinese news agency Xinhua reported.

Japan's foreign minister also said that sending Muto back to Seoul was in line with Prime Minister Yoshihiko Noda's policy to resolve the heightening feud by peaceful means and based on international law.

But Tokyo stiffened its rhetoric on the disputed islands, known as Takeshima in Japan and Dokdo in South Korea, with Gemba saying in a parliamentary session earlier Wednesday that South Korea's control of the islets amounted to an illegal occupation.

"We are in a situation where we cannot exercise part of our jurisdiction because of South Korea," Gemba was quoted by local media as saying. "We can say this situation constitutes an illegal occupation."

Both Gemba and Defense Minister Satoshi Morimoto used the expression "illegal occupation" for the first time since the ruling Democratic Party of Japan (DPJ) took power in 2009 -- marking a volitional change in the severity of language used by the Japanese government to describe its stance on the territorial dispute.

Gemba's remarks Wednesday came after South Korea swiftly rejected Japan's proposal to South Korea to take the island row to the ICJ to seek resolution on the issue.

South Korean Foreign Minister Kim Sung-hwan stated that the proposal from Japan is "not worth consideration," and warned that South Korea will take stern measures against Japan if it " continues to raise any unjustified issue over the islets," according to local media reports.

Gemba also rapped Kim for echoing remarks made by South Korean President Lee Myung-bak, calling for Japan's Emperor Akihito to apologize for the nation's past colonial rule of the Korean Peninsula if he were to visit South Korea.

Lee's comments were made on the back of an unprecedented visit by a South Korean president to the islands just days before the August 15 anniversary of Japan's World War II surrender, which ended its 35-year colonial rule over the Korean Peninsular.

The Japanese government is considering postponing an upcoming Japan-South Korea summit and intergovernmental consultations that are scheduled for the near future, in an official show of disapproval towards their South Korean counterparts, lawmakers here have said.

In addition, Finance Minister Jun Azumi also said that Japan may scale back its currency swap deal with South Korea from the current 70 billion U.S. dollar level.

Azumi will also be postponing this weekend's meeting with his counterpart in Seoul and Trade and Economy Minister Yukio Edano has decided not to hold bilateral talks with South Korean officials at the Association of Southeast Asian Nations economic ministerial meeting, which takes place later in August, officials said, in a sign the row will not rest in the near future.