The legacy of Japan's 1910-45 colonial rule of the Korean peninsula remains politically sensitive for both sides, with many surviving "comfort women" - a Japanese euphemism for the sex abuse victims - still demanding Tokyo's formal apology and compensation.
Bilateral relations between the two US allies have been strained for years by the issues of wartime sex abuse and forced labour, but South Korea's President Yoon Suk-yeol and Japanese Prime Minister Fumio Kishida have sought to improve ties.
The 16 victims filed the suit in 2016, seeking 200 million won ($A234,000) each in compensation, but the Seoul Central District Court dismissed the case in 2021, citing sovereign immunity, a legal doctrine that allows a state to be exempt from a civil suit in foreign courts.
The Seoul High Court, however, reversed the lower court's decision, recognising the jurisdiction of South Korean courts over the Japanese government as a defendant.
"It is reasonable to consider that there is a common international law which does not recognise state immunity for an illegal act ... regardless of whether the act was a sovereign act," the appellate court said in a statement.
The court also said the case fell within South Korea's jurisdiction as the plaintiffs live in the country and sought compensation over the acts that are deemed "unlawful" under its civil law.
Tokyo has said the issue was settled under a 1965 treaty that normalised diplomatic relations, and the two neighbours agreed to "irreversibly" end the dispute in a 2015 deal.
In a statement, Japanese Foreign Minister Yoko Kamikawa said the judgment went against international law and agreements between the two countries, calling it "extremely regrettable and absolutely unacceptable".
South Korea's foreign ministry said it was looking into details of the latest ruling.
Lee Yong-soo, a 95-year-old activist and victim who also filed the suit, welcomed the decision and tearfully thanked the court for the decision.
"I'm grateful. I'm really grateful," she said as she exited the courthouse, adding she wished she was able to share the news and gratitude with some other victims who had died.
1800 RESPECT (1800 737 732)
National Sexual Abuse and Redress Support Service 1800 211 028
