Japan recalled its ambassador to South Korea Friday to protest the placing of a statue symbolising victims of Japanese wartime sex slavery outside its consulate in the city of Busan last month.
In a move likely to reignite the decades-old feud over the so-called "comfort women", Chief government spokesman Yoshihide Suga also announced that high-level economic discussions would be postponed.
"Japan and South Korea are neighbours," Suga said. "It's a very important country. It's extremely regrettable we had to take this action."
"We have repeatedly and strongly requested to the Korean side to take appropriate action to solve this problem," he added.
"But at this moment, the situation hasn't improved. That's why we informed them of these actions."
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 changed tack and did not stop the activists from putting it back after Japan's hawkish defence minister Tomomi Inada offered prayers at a controversial war shrine in Tokyo last week.
Inada's visit last Thursday to the Yasukuni Shrine, which honours millions of mostly Japanese war dead -- but also senior military and political figures convicted of war crimes -- drew harsh criticism in South Korea as well as China.
- 'Very regrettable' -
Besides the recall of ambassador Yasumasa Nagamine, Suga also said Japan is ordering home its consul-general in Busan and suspending discussions over a Japan-South Korea currency swap.
"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.
Japan's decision was described as "very regrettable" by South Korean Foreign Ministry Spokesman Cho June-Hyuck.
"Even if there exist difficult issues, the government emphasises again that it will continue developing South Korea-Japan relations based on trust between the two governments."
Activists had first 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.
Under that accord, which both countries described as "final and irreversible," Japan offered an apology and a one-billion yen ($8.6 million) payment to surviving Korean comfort women.
But critics said the deal did not go far enough in holding Japan responsible for its wartime abuses.
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 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.
