Japan has chose to recall its ambassador to South Korea Yasumasa Nagamine over the erection of a new "comfort women" statue in South Korea, local media quoted Chief Cabinet Secretary Yoshihide Suga as saying on Friday.
The term "comfort women" is a euphemism for girls and women, from South Korea, China, the Philippines and elsewhere, forced to work in Japanese military brothels.
Under a historic deal signed in December 2015, the Japanese government pledged 1 billion yen ($8.55 million at current rates) for a foundation set up by the South Korean government to help comfort women.
The statue, which depicts a young, barefoot woman sitting in a chair, was erected near the Japanese consulate in the southern South Korean city of Busan at the end of a year ago.
However, critics said the agreement had failed to hold Japan responsible for wartime abuses. Many felt that the apology offered for crimes committed during the war did not address the comfort women specifically enough.
Tokyo will also suspend talks on a new currency swap arrangement that will oblige the two countries to offer US dollars or other currencies to each other during a financial crisis.
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Seoul expressed its consternation with Tokyo's decision to recall its ambassador, suspend talks, and pull its consul-general in Busan.
The statue, a copy of one that resides outside the Japanese embassy in Seoul, was initially removed by local authorities when it was placed outside the Busan embassy last week.
Japan says the statue violates a previous agreement on the issue.
The Japanese government said the statue in Busan, which is similar to the one that remains in front of the Japanese Embassy in Seoul, goes against the spirit of the agreement that pushes future-oriented relations. "It is important that both the Japanese and South Korean governments take responsibility and carry out the deal", Abe said, adding that "backpedaling is not constructive".
A statue from Korea commemorating the country's so-called "comfort women" at a Sydney church in Australia, December 15, 2016.