The island's governor wanted the base moved off Okinawa altogether and built in another part of Japan.
The US has about 26,000 troops and several bases in Okinawa as part of a deal with Japan after World War Two.
Many Okinawans, including the governor, object to the alleged crimes and accidents attributed to the troops.
The government wants to move the US Futenma airbase from its densely populated site to a more remote area.
Land reclamation work has already begun off the shore of Camp Schwab, the US base in Henoko, south of Nago city.
But construction work was suspended in March while judges heard the case.
Resentment at the US presence has been growing among Okinawans, particularly since the 1995 gang-rape of a 12-year-old girl by US troops.
Residents have also complained about the environmental impact of land reclamation.
Japan's Supreme Court has ruled in favour of the government's plan to relocate a US airbase to a remote part of the island of Okinawa.