Behind the decision
At the heart of the case was whether a 1965 treaty between the countries had already resolved the issue of wartime compensation.
The Supreme Court found that the treaty does not prevent individuals from making their own damage claims and ordered the company to pay each plaintiff $88,000.
Japanese Colonial Rule
Japan ruled the Korean Peninsula from 1910 to 1945. During this time, the government recruited Koreans to work at coal mines and construction sites in Japan due to a labor shortage. This practice was ramped up in the final stages of World War II, when the government applied the national requisition ordinance to people on the Korean Peninsula, conscripting them for wartime labor.
1965 Treaty on Basic Relations between Japan and South Korea
The treaty normalized relations between Japan and South Korea for the first time since the end of the war. The countries solved the compensation issue with "economic cooperation" consisting of $300 million in grants and $200 million in loans. The package was 1.6 times the size of South Korea's annual national budget at the time. The government used this money to build highways, a dam, and an iron mill.
After this, the countries acknowledged it was now the South Korean government's responsibility to pay individual citizens for colonial-era damages.
In the 1970s, the government used some of the money from Japan to compensate the families of 8,500 citizens who died carrying out wartime labor.
But it came under fire for the relatively small number of people who were compensated. As a result, the government made further payments starting in 2008. Nonetheless, a number of individuals have made their own claims, seeking direct compensation from Japanese companies.
Japanese Prime Minister Shinzo Abe told reporters that the compensation issue had already been settled by the 1965 treaty, making the ruling unacceptable in terms of international law.
Foreign Minister Taro Kono spoke with his South Korean counterpart, Kang Kyung-wha, over the phone following the announcement.
"Japan takes the ruling very seriously," he told reporters after the call. "It fundamentally undermines the legal foundation that bilateral relations have been based on since the two countries normalized diplomatic ties in 1965. I called on the South Korean government to take a stern and firm response."
Kang said her government respects the ruling and is considering a number of related issues. But President Moon Jae-in did not comment.
Hideki Okuzono is an associate professor of politics and diplomacy on the Korean Peninsula at the University of Shizuoka. He says Moon is in a difficult position.
"The administration is in a tough spot," he says. "Moon rode a wave of overwhelming public support into office, so he is more reliant on the voices of the people than any of his predecessors."
Okuzono says Moon has to strike a balance between those in his country who support the Supreme Court verdict on the one hand, and the need to maintain Japanese support in the North Korea issue on the other.
"99% of Moon's attention is focused on North Korea: how to manage and advance relations to bring lasting peace to the peninsula, and creating a system for the two countries to co-exist. Moon can't afford to let relations with Japan strain because he needs it to press ahead with his top policy priority."
While Japan and South Korea have recently strengthened ties, their relations have yet to come up against anything as potentially troublesome as this Supreme Court verdict. Navigating the situation will be one of Moon's biggest challenges so far as president.