Japan said on Friday it was recalling its ambassador to South Korea over a statue commemorating Korean women forced to work in Japanese wartime military brothels during World War Two.
Chief cabinet secretary Yoshihide Suga said the statue in the southern city of Busan was "extremely regrettable" and that Japan asked for its removal.
He said Japan would also postpone bilateral "high-level" economic dialogue.
Japan also suspended talks on a new currency swap arrangement with South Korea.
"Without building relations of trust, it won't stabilize," Finance Minister Taro Aso reporters, referring to the currency swap arrangement.
The term "comfort women" is a euphemism for girls and women forced to work in wartime Japanese military brothels. South Korean activists estimate that there may have been as many as 200,000 Korean victims.