The South Korean government went ahead with the deal despite opposition from some political parties and a large section of the public, who remain bitter over Japan's actions during its colonial rule of Korea from 1910 until the end of World War II.
The signing of the General Security of Military Information Agreement had originally been expected in 2012, but South Korea postponed it due to the domestic opposition.
The case for the neighbours to pool intelligence has increased, however, as North Korea has been testing different types of missiles at a faster rate, and claims it has the capability to mount a nuclear warhead on a missile.
"Cooperation between Japan and South Korea is becoming more important than ever in the security sphere as North Korea's nuclear (development) and missiles pose a different level of threat from before," public broadcaster NHK quoted Japanese Foreign Minister Fumio Kishida as telling reporters in Miyagi Prefecture, northeastern Japan. "Signing of the pact has a very important significance."
In Beijing, which is North Korea's most important supporter despite Chinese anger at its missile and nuclear tests, the foreign Ministry said the agreement would add to tensions on the Korean peninsular.
"This will add a new unsafe, unstable element for northeast Asia," ministry spokesman Geng Shuang told a daily news briefing.
South Korea's Defence Minister Han Min-koo and Japan's ambassador to the South, Yasumasa Nagamine, inked the agreement in Seoul, according to the South Korean Defense Ministry.
A survey by Gallup Korea on Friday showed that 59% of 1,007 respondents opposed the agreement between the two countries.
Many of protesters demanding President Park Geun-hye to resign over a influence-pedaling scandal also insisted Park withdraw the military information sharing agreement with Tokyo.
A Defense Ministry official said South Korea now has deals with 33 countries, including the United States and Russia, on military intelligence sharing.