The 28-year-old Yafai, a former factory worker, won on split points in an enthralling contest to earn Britain's first boxing gold in Tokyo.
Yafai, cheered on from the stands by his British teammates -- many of them with the country's flag draped over their shoulders -- had the Filipino down in the first round of the scheduled three after an incisive three-punch combination.
Britain, who like the Philippines have a proud boxing history, have now won one gold, two silvers and two bronze in the sport in the Japanese capital.
Despite the disappointment for 23-year-old Paalam, the Philippines have enjoyed a breakthrough fortnight in boxing at the Games.
Nesthy Petecio won women's featherweight silver and Eumir Marcial took men's middleweight bronze.