Japan has postponed high-level economic discussions with South Korea to express its displeasure at the placement of a statue symbolising victims of Japanese wartime sex slavery outside its consulate.
Tokyo also recalled its ambassador to South Korea in protest, reports the Guardian.
Chief government spokesman Yoshihide Suga announced the temporary move at a media conference along with additional measures that include postponing high-level economic discussions.
"The Japanese government finds this situation extremely regrettable," he said.
Besides the recall of ambassador Nagamine, Suga also said Japan was ordering home its consul-general in Busan - the city featuring the offending statue - and suspending discussions on 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.
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The statue was initially removed after being set up by South Korean activists in the southern port city.
However, local authorities allowed it after Japanese Defence Minister Tomomi Inada offered prayers at a controversial war shrine in Tokyo last week.