The Japanese government settled a 17-year legal battle yesterday with 500 citizens who have been made sick by air pollution. The plantiffs, who live along highways in Kawasaki, an industrial city just south of Tokyo, filed suit claiming that they suffered from asthma and other ailments caused by exhaust from passing cars and trucks. Last year, a court ordered the government and local highway agency to pay $1.2 million in compensation. The defendants appealed the case, however, and yesterday a deal was struck that requires the authorities only to admit fault and promise to work to improve air quality along the highways in question. The plaintiffs dropped demands for compensation because many are old and feared they wouldn’t live long enough to get the money.