The long-awaited ruling, delivered after more than five years of deliberation at Seoul's top court, could have larger implications for similar lawsuits that are pending in South Korea and will likely trigger a diplomatic row between the Asian U.S. allies.
Japanese Foreign Minister Taro Kono said that the ruling "clearly violated" a 1965 treaty between Seoul and Tokyo accompanied by Japanese payments to restore diplomatic ties. He threatened "resolute" counter-measures from Tokyo, which could potentially take the case to the International Court of Justice.
"We strongly urge South Korea to correct the illegal status under the international law and take appropriate measures," Kono said.
South Korea's Foreign Ministry spokesman Noh Kyu-duk said Tokyo and Seoul "should gather wisdom" to prevent the ruling from negatively affecting their relations.
The court said Japan's Nippon Steel & Sumitomo Metal Corporation should compensate 100 million won ($87,680) each to four plaintiffs, who were forced to work at Japanese steel mills from 1941 to 1943. Among them, only 94-year-old Lee Chun-sik has survived the legal battle that extended for nearly 14 years.
"I won the case but I am here alone, so I am sad, a lot of tears are coming out," an emotional Lee told reporters after the ruling. "It would have been good if we were still here altogether."
The court rejected Nippon Steel's argument that the matter of compensating forced laborers had already been settled by the 1965 treaty. The court also rejected the company's argument that it was a different entity from the steelmaker that forced the South Koreans to work for it during the war.
Seoul and Tokyo's bitter disputes over history, also including issues surrounding South Korean women forced into wartime sexual slavery, have complicated Washington's efforts to strengthen trilateral cooperation to deal with North Korea's nuclear threat and China's growing influence in the region.
South Korean President Moon Jae-in, who once represented South Korean forced laborers as a lawyer in the 2000s, said after taking office last year said that the 1965 treaty cannot prevent individuals from exercising their rights for damage compensation. Tokyo saw Seoul as departing from a long-standing position held by both governments that the issue of forced labor compensation had been settled.
Moon has also questioned the validity of a 2015 agreement with Japan negotiated by Seoul's previous conservative government to compensate South Korean women forced into sexual slavery by Japan's wartime military. Many South Koreans believe Seoul settled for far too less in the sex slave deal and have been calling for the disbanding of a Seoul-based foundation established to support the victims with the 1 billion yen ($9 million) provided from Japan.
Tokyo maintains that the $500 million Japan provided to South Korea under the 1965 treaty was meant to permanently settle all wartime compensation issues. But the Supreme Court in Tuesday's ruling said the treaty does not terminate individuals' rights to seek compensation for the "inhumane illegal" experiences they were forced into.
The four plaintiffs filed a damage lawsuit against Nippon Steel with the Seoul Central District Court in 2005 after two of them lost a similar suit filed in Japan. The Supreme Court in 2012 overturned rulings by lower courts that denied compensation for the plaintiffs and sent the case back to the Seoul High Court, which in 2013 ruled that Nippon Steel compensate the plaintiffs 100 million won each.
Tuesday's ruling came more than five years after the company appealed the high court decision in August 2013.