South Korea's top court ruled on Tuesday Japan's Nippon Steel & Sumitomo Metal Corp. should compensate four South Koreans for their forced labour during World War Two, a decision that could freeze ties between the uneasy neighbours.
Nippon Steel said the verdict was "deeply regrettable" and that it would review it before taking any next steps. Japan's Foreign Ministry said it would summon the South Korean ambassador.
In a landmark ruling, South Korea's Supreme Court upheld a 2013 order for the company to pay 100 million won ($87,700) to each of the four steel workers who initiated the suit in 2005, seeking compensation and unpaid wages.
The court ruled that the former labourers' right to reparation was not terminated by a 1965 treaty normalising diplomatic ties, rejecting the claim by Tokyo and Japanese courts, Yonhap news agency said.
Japan and South Korea share a bitter history that includes Japan's 35-year occupation of the Korean peninsula until 1945 and the use of comfort women, Japan's euphemism for girls and women, many of them Korean, forced to work in its wartime brothels.
Japan's Foreign Ministry told Reuters that the issue of compensation was "settled completely and finally" by the 1965 deal.
Lee Choon-shik, the 98-year-old sole surviving plaintiff, welcomed the ruling, saying in a televised news conference that it was "heartbreaking to see it today, left alone alive".
Some Seoul officials and experts fear the court's decision, final and binding, could bring repercussions for relations.
If Nippon Steel refuses to compensate, the plaintiffs could request a seizure of the company's property in South Korea, which may result in an exit of some Japanese businesses and a cut in investment.
South Korea's foreign ministry said in 2016 any seizure of company assets could drive relations into an "irreversible catastrophe".
"We might have to brace for not only a diplomatic crisis but a pull-out of some Japanese firms and a fall in new investment," said Shin Beom-chul, a senior fellow at Asan Institute for Policy Studies in Seoul.
Nippon Steel could seek international arbitration, said Jin Chang-soo, president of the Sejong Institute think tank.