Japan and South Korea are considering settling a dispute over wartime labor compensation and other pending bilateral issues in a package deal amid a growing momentum toward improving ties, a diplomatic source said Saturday.

If Seoul decides to ensure compensation payment to former Korean laborers through a government-backed foundation instead of asking Japanese companies to do so, Japan would lift restrictions on certain tech exports to South Korea and agree on the resumption of reciprocal visits by the countries' leaders, the source said.

The South Korean government is arranging to announce a solution as early as next week, a source familiar with the matter said. The JoongAng Ilbo newspaper is flagging Monday for the likely announcement that the South Korean foundation will pay the plaintiffs what South Korea's top court has ordered two Japanese companies to pay in damages.

Bilateral ties have been strained after South Korean top court rulings in 2018 ordered the two Japanese companies to pay damages over forced labor. The companies have refused to comply with the orders as Japan has maintained that all issues stemming from its 1910-1945 colonization of the Korean Peninsula were settled under a bilateral agreement signed in 1965.

But efforts to mend ties have accelerated under South Korean President Yoon Suk Yeol, and Seoul has been considering using a foundation that would be funded by South Korean companies to pay the compensation instead of Japanese firms.

Such companies benefited from the $500 million Japan had provided to South Korea in the name of "economic cooperation" in a deal forged when the two countries normalized diplomatic ties in 1965.

The idea, however, has faced domestic backlash as it has been viewed as favoring Japan. The plaintiffs' supporters are calling for the Japanese companies to pay damages as ordered by the Supreme Court.

The Japanese and South Korean governments apparently want to show through the envisioned package that a solution to the wartime labor issue will set the stage for normalizing bilateral ties in other areas.

"Once South Korea makes a formal decision on a solution (on labor issues), Japan will do what it can to improve relations," a senior Japanese Foreign Ministry official said.

Discussions between Japanese and South Korean officials on the matter have progressed to a point where political decisions are needed, according to the diplomatic source who said the two countries are considering a package deal.

As part of the package, the Japanese government will allow Japanese firms to voluntarily provide donations to the South Korean foundation and express remorse to former Korean laborers, in line with past government statements over Japan's wartime aggression in Asia, according to the source.

The Japanese government also plans to lift restrictions on semiconductor material exports to South Korea imposed in July 2019, returning the country to a "white list" of trusted trade partners that receive preferential treatment.

But the move related to exports will likely come sometime later to support the Japanese government's assertion that introducing the restrictions was unrelated to the wartime labor issue.

The two countries are also considering restarting the past bilateral practice in which their leaders regularly visited each other's country, typically once a year.

No such exchanges have been held since December 2011 after then Japanese Prime Minister Yoshihiko Noda and South Korean President Lee Myung Bak traded barbs during a meeting in Kyoto over the issue of Koreans who were forced to work as "comfort women" in Japan's wartime military brothels.

On the local media reports about an impending announcement from the South Korean government, a South Korean Foreign Ministry source said consultations between the two countries are "ongoing" and that a solution will be "explained as soon as they are concluded."

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