Defender Yasuyuki Konno sent the ball into the roof of the net on the final spot kick to send Japan through, only minutes after South Korea defender Hwang Jae-won had scored to make it 2-2 with less than a minute to go in injury time.
Japan will play either Australia or Uzbekistan in Saturday's final. Japan is seeking a record fourth title.
The two teams were level at 1-1 after 90 minutes but Japan went ahead in the 98th when substitute midfielder Hajime Hosogai followed through to drive the ball into the roof of the net after Keisuke Honda's penalty had been saved.
Japan earned the questionable penalty when Hwang bumped into Okazaki at the edge of the penalty box and the Japan forward went down. Saudi Arabian referee Khalil Al-Ghamdi appeared to hesitate for a few seconds before pointing at the spot, “It was quite strange when the referee pointed outside the penalty area and the linesman pointed inside,” South Korea coach Cho Kwang-rae said. “It's part of the game and I respect the decision of the referee.” South Korea also got a penalty to go ahead in the match.
Captain Park Ji-sung, playing in his 100th international match, earned the penalty when he latched onto a deep cross only to be downed by Konno in the 23rd. Ki Sung-yueng converted from the spot.
Japan equalized with a lightning-fast, brilliantly executed move. Honda sent a perfect through ball to Yuto Nagatomo on the left flank and he crossed low for striker Ryoichi Maeda to knock into the net in the 36th.
The first two South Korean shootout takers, Koo Ja-cheol and Lee Yong-rae, had their shots stopped by Japan goalkeeper Eiji Kawashima, while Honda and Shinji Okazaki made no mistakes.
Nagatomo then lifted his shot high, but Hong Jeong-ho then drilled his shot wide and Konno secured Japan's victory.
Japan lost a penalty shootout against South Korea in the match for third place four years ago.
South Korea has not won the tournament since 1960, when it captured the last of its two consecutive titles.
