The statue's erection came as Japan had demanded Seoul remove another statue in front of Japan's Embassy.

"The deal remains controversial, particularly in light of two statues of comfort women in South Korea, including one located in front of the Japanese Embassy," the CRS said in the report. "The comfort women agreement and overall relations with Japan could become political flashpoints in the upcoming election in South Korea, a development that could hamper US-Japan-South Korea trilateral cooperation."

In the South's presidential election, "more progressive candidates" could target Park's outreach to Japan and reverse some of the initiatives that led to improved relations, including the signing of a bilateral military information sharing agreement, the CRS said.

"A poor relationship between Seoul and Tokyo jeopardizes US interests by complicating trilateral cooperation on North Korea policy and on responding to China's rise," the report said. "Tense relations also complicate Japan's desire to expand its military and diplomatic influence as well as the potential creation of an integrated US-Japan-South Korea ballistic missile defense system."

On security issues, the CRS report said that a lack of confidence in the US security guarantee could prod Japan to reconsider its own status as a non-nuclear weapons state and pursue nuclear weapons, which in turn could lead South Korea to follow suit.

"As a presidential candidate Donald Trump in spring 2016 stated that he was open to Japan developing its own nuclear arsenal to counter the North Korean nuclear threat," the report said, adding that Japan would face a series of consequences, such as sanctions, if it decides to go nuclear.

"If it were to develop its own nuclear weapons, including significant costs; reduced international standing in the campaign to denuclearize North Korea; the possible imposition of economic sanctions that would be triggered by leaving the global non-proliferation regime; and potentially encouraging South Korea to develop nuclear weapons capability," it said.

Meanwhile, as in last year's report, this year's report continued to describe the body of water between South Korea and Japan as the "Sea of Japan," rather than its original name the "East Sea." (Yonhap)