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South Korea said on Monday that its companies would compensate people forced to work under Japan's 1910-1945 occupation, seeking to end a dispute that has undercut U.S.-led efforts to present a unified front against China and North Korea.

The proposal was welcomed in Tokyo but faced an immediate backlash from some victims and from South Korea's main opposition party, who accused the government of capitulating to Japan.

U.S. President Joe Biden, whose administration has pressed its two allies to reconcile, hailed the announcement as "groundbreaking".

A Japanese government source close to Prime Minister Fumio Kishida told reporters the United States had been pressing for reconciliation but that a main factor that triggered a push by South Korean President Yoon Suk Yeol for reconciliation was the geopolitical threat from North Korea.

The disagreements over labour and women forced into Japanese military brothels have bedevilled ties between the neighbours for decades.

Under the plan, South Korea would compensate former forced labourers through an existing public foundation funded by private-sector companies, South Korea's Foreign Minister Park Jin told a briefing.

"The soured South Korea-Japan relations should no longer be neglected, and we need to end the vicious cycle for the national interest, for the people," Park said. He said he hoped Japan would respond sincerely, including by "implementing its previous public statements expressing remorse and apology".

Japanese Prime Minister Fumio Kishida said he welcomed the proposal and would work closely with Yoon.

Japanese companies will not be expected to make any payments under the plan but would not be blocked from donating if they wanted to, said Japan's foreign minister, Yoshimasa Hayashi.

"We welcome this as a step that returns Japan-South Korea relations to a healthy one," he said.

A Japanese government source told Reuters that Japan and South Korea were preparing for a visit by Yoon to Tokyo by the end of March. The two governments were considering arranging the visit on March 16-17, the Kyodo news agency reported.

A spokesperson for Yoon's office declined to comment.

Poor relations between the two have been a worry for the United States as it seeks to present a unified front against the rising power of China and threats from North Korea's expanding missile and nuclear arsenal.

Biden, in a statement, hailed "a groundbreaking new chapter of cooperation and partnership between two of the United States’ closest allies ... (a) critical step to forge a future for the Korean and Japanese people that is safer, more secure, and more prosperous".

SOUTH KOREAN FUNDS

Relations plunged to their lowest point in decades after South Korea's Supreme Court in 2018 ordered Japanese firms to pay reparations to former forced labourers. Fifteen South Koreans have won such cases, but none has been compensated.

Only three of those plaintiffs are still alive. Overall there are fewer than 1,300 living victims of forced labour in South Korea, according to media estimates.

Japan has said compensation was settled under a 1965 treaty, and Hayashi said his government's stance had not changed.

When Seoul first raised its proposal in January, it sparked a backlash from victims and their families because it did not include contributions from Japanese companies, including those ordered by South Korean courts to make reparations.

About a dozen protesters demonstrated outside as Park made the announcement.

"Today's humiliating resolution is a result of (the South Korean government's) consistently low posture towards the Japanese government," representatives of some of the victims said at a separate event.

Some of the 15 plaintiffs say they will reject the government plan, setting the stage for more legal battles.

"It's not a proper apology," Yang Geum-deok, one of the victims, told reporters.

The main opposition Democratic Party denounced the plan as "submissive diplomacy".

"It's a day of shame," a spokesperson for the party said.

The South Korean companies include KT&G (033780.KS), Korea Electric Power Corp (KEPCO) (015760.KS) and other companies that benefited from a 1965 treaty between South Korea and Japan.

KT&G said it was monitoring the discussion on compensation and planned to faithfully cooperate in implementing the agreements. KEPCO said it would review the issue.

POSCO holdings said it would consider how to support the intent of the government's announcement.

Asked whether Japanese companies would pitch in to compensate, Park said both Japanese and South Korean businesses were considering a plan to contribute.

South Korea's Yonhap news agency, citing government sources, had said that as part of the deal Seoul and Tokyo had tentatively agreed to create a separate "future youth fund" to sponsor scholarships with funds from companies from both sides.

Two of the companies ordered by South Korean courts to make restitution, Mitsubishi Heavy Industries Ltd (7011.T) and Nippon Steel Corp (5401.T), declined to comment on the agreement, referring to their long-held stance that the issue had been resolved under the 1965 treaty.

The row spilled over into trade in 2019, with Tokyo tightening curbs on exports to South Korea of high-tech materials used in smartphone displays and chips and Seoul filing a World Trade Organization (WTO) complaint in response.

Hayashi said the export curbs are separate from the forced labour dispute, but on Monday both countries' trade ministries said South Korea would put its WTO complaint on hold while the two sides negotiate to return trade to its pre-2019 status. (Reuters)