Japan will remove South Korea from its list of trusted trade partners, deepening a bitter row between the two countries.
The decision to strike South Korea off its so-called “white list” puts fresh trading restrictions on the country.
Seoul had previously warned the move would have “grave consequences” for ties between the Asian nations.
It comes after Japan imposed stricter rules on the export of materials key to South Korea’s tech manufacturers.
Those restrictions, on products needed to make display panels and memory chips, have worried Seoul over the risks to its already slowing economy.
It has also rattled the electronics industry over potential threats to the global supply chain.
Japan has said the measures are based on national security concerns, citing South Korea’s insufficient export controls, according to Reuters.
The decision to take Seoul off the white list is expected to take effect later this month.
The trade row between Tokyo and Seoul has been fuelled by a diplomatic dispute over compensation for wartime labour.
Last year, South Korean court rulings ordering Japanese firms pay compensation to Koreans over forced wartime labour inflamed long-running tensions.
The export curbs apply to three high-tech materials: fluorinated polyimide, photoresists and hydrogen fluoride.
These are key industries for South Korea.
The country’s tech giants Samsung Electronics and SK Hynix exported around 60% of global memory components last year, according to IHS Markit.