His more recent fiction contains elements of fantasy.
With the critically-acclaimed dystopian work Never Let Me Go from 2005, Ishiguro introduced "a cold undercurrent" of science fiction into his work, the jury said.
Inspired by Fyodor Dostoyevsky and Marcel Proust, Ishiguro's characters often painfully come to terms with who they are without closure.
His latest novel, The Buried Giant from 2015 explores "in a moving manner, how memory relates to oblivion, history to the present, and fantasy to reality."
In the book, an elderly couple go on a road trip through an archaic English landscape, hoping to reunite with their adult son, whom they have not seen for years.
Ishiguro was not among those tipped as a favourite for this year's Nobel.
His publisher Faber & Faber wrote on Twitter after the announcement, "We're THRILLED Kazuo Ishiguro has won the Nobel Prize!"
Last year, the 18 members of the Swedish Academy stunned the world by awarding the honour to American rock legend and counter-culture icon Bob Dylan.
The Nobel comes with a prize sum of nine million kronor $1.1 million (Sh113.4M).
Ishiguro will receive his prize at a formal ceremony in Stockholm on December 10.