Japan, which is famous for protecting its agricultural sector, had earlier expressed reluctance at a trade pact, believing it would favor Australia.

"Australia hopes to start official negotiations on an FTA next year," Downer told Japanese Foreign Minister Taro Aso, as quoted by a Japanese official privy to their talks.

"It is possible to proceed with negotiations while paying consideration to sensitive issues for both countries," Downer said.

Japan during an April 2005 visit by Prime Minister John Howard agreed only to a two-year feasibility study on a free trade agreement -- not actual negotiations.

Aso said he was willing to move more quickly with the feasibility study but did not say whether Japan would open FTA negotiations with Australia.

"The economic relationship between Japan and Australia is very important and this should be strengthened. And the feasibility study should be sped up," Aso was quoted as saying.

But he added: "Japan's agriculture sector's liberalization has been gradually proceeding step by step. This sensitivity needs to be considered."

By contrast, Australia last year agreed to open FTA talks with China in first-of-a-kind negotiations between Beijing and a developed country.

Japan has been increasingly pursuing free trade pacts seeking to secure access to raw materials and markets for its exports.

It has stepped up negotiations amid a stalemate in global trade liberalization talks, which collapsed last month.

Japan's first FTA, with Singapore, took effect in late 2002 and Japan has since agreed on deals with Mexico, Malaysia, Thailand and the Philippines.

It has ongoing negotiations with South Korea, Indonesia and the 10-nation Association of Southeast Asian Nations (Asean) as a whole.