Prime Minister Lee Nak-yon on Saturday blasted Japan for its decision to remove South Korea from a whitelist of trusted trading partners, saying that it "crossed a line it should not have."
"(The decision) is the second retaliation after the country imposed export restrictions on key chip materials," Lee said at a Cabinet meeting.
He also said such moves could "jeopardize bilateral relations between South Korea and Japan, international free trade and interdependent economic cooperation regime, and cause a crack in the three-way security alliance with the United States."
"We cannot but sternly deal with the matter."
On Friday, Japan's Cabinet passed a bill striking South Korea from its list of countries that require only minimal procedures to purchase sensitive materials that can be used for military use.
South Korean President Moon Jae-in has denounced Japan's move as a "very reckless decision", warning that South Korea will take corresponding measures and Japan will bear full responsibility for the consequences.
In Saturday's cabinet session, Lee promised all-out efforts to cope with the repercussions and devise detailed follow-up measures with full interagency collaboration, as well as cooperation with companies.
The National Assembly passed a 5.83 trillion-won (US$4.9 billion) supplementary budget bill on Friday to support the government's efforts to prop up the slowing economy and tackle Japan's export curbs against Seoul.
The extra budget bill includes 273.2 billion won set aside to tackle the restrictions, Lee noted, promising to work to best execute the plan.
The budget approval came after the parliament unanimously adopted a resolution condemning Japan over the export controls and calling for an immediate withdrawal of the measures against South Korea at a plenary meeting the same day.
After the Cabinet meeting, Finance Minister Hong Nam-ki told officials that the ministry will draw up financial and tax measures for companies to minimize the impact of Japanese trade curbs.
The government must make efforts to prevent domestic economic sentiment from worsening over the Japanese measures, Hong said.
Separately, South Korea's financial regulator called an emergency meeting on Saturday with executives from banks to discuss financial support for companies that are affected by Japan's decision to remove Korea from the list of trusted export destinations.
The Financial Services Commission (FSC) said state-run financial institutions will offer a one-year extension of maturity for outstanding loans and guarantees for companies that are subject to Japan's tightened export controls.
State-run financial institutions will also provide fresh loans of 6 trillion won to help stabilize affected business operations and diversify their supply chains, the FSC said.
The FSC has played down market speculation that Japan's export curbs may escalate into retaliatory measures in the Korean financial sector.
However, the government is closely monitoring market situations and remains vigilant with contingency plans in place against any possible scenario, the FSC said. (Yonhap)