Tokyo has recalled its ambassador to South Korea to protest against the placing of a statue symbolising victims of Japanese wartime sex slavery outside Japan's consulate in the city of Busan.
Talks between the two countries over a new currency swap agreement have also been suspended due to the statue, according to Japan’s chief government spokesman, Yoshihide Suga.
"The Japanese government will continue to strongly urge the South Korean government as well as municipalities concerned, to quickly remove the statue of the girl," Suga said on Friday.
The move may reignite the decades-old feud over victims of Japanese wartime sex slavery, usually referred to as "comfort women".
The statue - a copy of one that sits across the road from the Japanese embassy in Seoul - was initially removed after being set up by South Korean activists in the southern port city on Wednesday last week.
But local authorities did not stop the activists from putting it back after Japan's Defence Minister Tomomi Inada offered prayers at a controversial war shrine in Tokyo last week.
The term "comfort women" is a euphemism for girls and women, from South Korea, China, the Philippines and elsewhere, forced to work in wartime Japanese military brothels. South Korean activists estimate that there may have been as many as 200,000 Korean victims.
Activists placed the new statue outside the consulate to mark their opposition to a South Korea-Japan agreement reached a year ago to finally resolve the "comfort women" issue.
Both nations agreed to put the issue behind them after Japan formally apologised and paid out one billion yen ($8.6 million) to surviving Korean comfort women.
However, critics of the deal say it does not go far enough in holding Japan responsible for its wartime abuses.
South Korea criticised Japan, saying Friday's decision was "highly regrettable".
"Even if there are difficult issues, the governments of both countries must continually develop South Korea-Japan relations based on a relationship of trust," the South Korean Foreign Ministry said in a statement.
The statue in Seoul - a bronze of a young, seated woman with a small bird on her shoulder - has proved an extremely potent and popular symbol.
Japan says it should have been removed after the "comfort women" accord was signed, but Seoul argued that it had only agreed to look into the possibility of moving it.
For the past year, activists have maintained a 24-hour vigil to prevent the statue being taken away.
More than two dozen similar monuments have been erected around South Korea, and another dozen or so abroad in the United States, Canada and elsewhere.
Source: News agencies