The Ministry of Gender Equality and Family announced on Wednesday that the government will dissolve the Reconciliation and Healing Foundation, also known as the "comfort women" foundation.
The foundation was first established in a bilateral agreement with Japan in 2015, under the former Park Geun-hye administration, to financially support the victims and their families.
Japan provided funding of 1 billion yen, or 8.8 million U.S. dollars.
However, the foundation was controversial from the very start.
While Tokyo has claimed that the agreement is enough to completely settle the issue of comfort women, critics of the deal have called it "unilateral" and say is doesn't reflect the wishes of the victims, nor come with Japan's apologies.
Gender Equality and Family Minister Jin Sun-mee says the decision to disband it was made to prioritize the victims' interests, and that the ministry will continue its efforts to recover their honor and dignity.
Following the announcement, the ministry will push forward with the legal procedures required for the shutdown.
It will also work with Seoul's foreign ministry to return the fund provided by the Japanese government.
While the decision is being welcomed across the nation, it has prompted immediate criticism from Japan.
Prime Minister Shinzo Abe said the 2015 agreement was "final and irreversible."
He also called for South Korea to act responsibly, warning that bilateral relations cannot be sustained unless international promises are kept.
In response to this, Seoul's foreign ministry says an agreement that that does not reflect the opinions of the victims cannot be a real solution.
And it says the government will continue to work toward reaching the right resolution, to heal the wounds of the victims.
Park Hee-jun, Arirang News.