A restrained relationship between the Soviet Union and Japan, great military and economic powers and geographically close neighbors in Northeast Asia, is an international anomaly of considerable magnitude. Resolution of this anomaly has been delayed for the last forty-five years by several factors, but none more so than that of what has commonly been referred to as the "Northern Territories" dispute. The territorial dispute of the Northern Territories, otherwise known as the four islands of Etorofu, Kunashiri, Shikotan and the Habomai group is discussed in relation to both the historical and contemporary policies of Japan and the USSR. According to the Soviet’s perspective these islands belong to them on the basis of their military annexation in 1945. Japan fails to recognize this sovereignty, hence, leaving Japan and the USSR in a technical state of war, impeding normal Soviet-Japanese relations. Presently, Gorbachev’s policy of Perestroika has indicated the possibility of concessions and rapprochement over the islands after forty-five years of consistent deadlock. This new Soviet policy is aimed at improving relations with Japan and moving toward more economic and political cooperation, allowing the Soviets to participate in the economic prosperity of the Pacific Basin. However, Japan refuses to comply with such concessions, and demands Soviet recognition of the territorial issue prior to negotiations. Furthermore, opposition toward such conciliation exists in the USSR since any concession might lead China and other nations to press their own territorial claims. Thus, the political, economic and strategic implications of the Northern Territories problem ensures that it will remain a critical contemporary geopolitical issue in Northeast Asia. / Master of Science