The Nobel Committee said Ishiguro’s novels had “uncovered the abyss beneath our illusory sense of connection with the world” with “great emotional force”.
The author is best known for The Remains Of The Day, which explores loyalty, duty and love through the relationship between a butler and his employer.
He also wrote the dystopian novel Never Let Me Go, about three British youngsters who leave an idyllic boarding school to discover the depths of their existence.
Both books achieved broader success after being made into films, starring A-listers like Keira Knightley, Carey Mulligan and Andrew Garfield, as well as Anthony Hopkins as the butler in The Remains Of The Day.
“He’s a very interesting writer in many ways,” said Sara Danius, the academy’s permanent secretary.
“I would say that if you mix Jane Austen – her comedy of manners and her psychological insights – with Kafka, then I think you have Ishiguro.”
Born in Nagasaki, Japan, in 1954, Ishiguro reckoned with the country’s history in the shifting and unreliable narrative of his second novel, An Artist Of The Floating World.
His work is renowned for a sparse and restrained style of writing and stories in which consolation is perpetually hinted at but, ultimately, denied.
He is the first Briton to win the prize in 10 years, after Doris Lessing in 2007.
Ishiguro was not among the favourites to win the prestigious prize, with bookies giving bigger odds to names such as Japan’s Haruki Murakami and Canada’s Margaret Atwood.
It was suggested the academy would be more conventional this year, after Bob Dylan picked up the prize to much criticism from literature purists.
— The Nobel Prize (@NobelPrize) October 5, 2017
Ms Danius said the choice of Ishiguro did not show intention to avoid the controversy sparked by last year’s pick of Dylan.
“No, we don’t consider these issues,” she said.
“We thought that last year was a straightforward choice – we picked one of the greatest poets in our time.
“This year, we have picked one of the most exquisite novelists in our time.”
Ishiguro will receive from the Swedish academy nine million kronors (£830,000).