The Supreme Court ruling upheld a 2013 verdict favoring four South Koreans subjected to hard labor during Imperial Japan's colonial rule over the peninsula.
The court decision contradicted a previous Japanese ruling to dismiss personal rights to compensation for wartime crimes and ordered Japanese steelmaker Nippon Steel & Sumitomo Metal Corp. to pay 100m won (US $87,720) to the victims.
Seoul's supreme courts clarified that individual compensation rights remained valid, despite settling reparations claims at the government level in 1965.
The ruling ended roughly 14 years of legal disputes over the issue and is expected to affect around a dozen more, inundating courts with new cases and damaging already tense Korea-Japan ties.
"The ruling is expected to shake the foundation of South Korea-Japan relations maintained since the signing of the 1965 agreement on the settlement of problems related to property, claims and economic cooperation," one anonymous senior foreign ministry official told Yonhap News Agency.
"This decision clearly violates Article II of the Agreement and inflicts unjustifiable damages and costs on the said Japanese company," Kono continued.
"Above all, the decision completely overthrows the legal foundation of the friendly and cooperative relationship that Japan and the Republic of Korea have developed since the normalization of diplomatic relations in 1965," he said.
If measures to remedy the decision are not taken, Japanese officials may "examine all possible options" to protect "the legitimate business activities by Japanese companies," the statement continued, with Tokyo potentially appealing cases to the International Court of Justice (ICJ).
"If that happens, it's hard to say we will surely win the ICJ suit," Seoul's ministry official said.
Former Vice foreign minister and ambassador to Tokyo Shin Kak-soo told Yonhap News that chances were high that "South Korea-Japan relations will be exacerbated further," adding that both countries should work through the consequences of the ruling, which could destroy over five decades of bilateral ties.
History of Bilateral Relations
The latest diplomatic row has forced Seoul's foreign ministry to review its official stance on compensations, in addition to its strategy towards Japan.
The ruling will also change how Seoul handles Tokyo's comfort women scandal, where Japanese Imperial soldiers forced nearly 400,000 Korean, Chinese, and Filipino women into prostitution, causing further tensions after Japan funded the Reconciliation and Healing Foundation for victims.
Current South Korean president Moon Jae-In insinuated he would disband the foundations due to public outcry over the December 2015 agreement signed between former South Korean president Park Geun-Hye and Japanese prime minister Shinzo Abe.
"It's a very difficult problem and there's no certain solution," Korea University professor Park Hong-kyu told Yonhap. "The government will have to prepare for a response prudently, rather than rushing to react."
