"There is a strong likelihood that this dispute will be resolved," Fukuda told news agencies from the Group of Eight rich nations ahead of their summit in Japan in July.

"We would like to turn the sea into a sea of peace and cooperation."

Fukuda, a longtime advocate of reconciliation with China, said he expected a deal "soon," but did not announce a date.

"The idea is to jointly excavate and drill and produce," he added.

"If we engage in debate forever, then the actual production and delivery will be delayed forever."

According to Japanese media reports, Japan has agreed to make an investment in China's already existing production, with the exact financial details yet to be worked out.

China said later Tuesday in response to Fukuda's remarks that its position remained unchanged.

"The Chunxiao gas field falls fully within China's sovereign rights," foreign ministry spokeswoman Jiang Yu told reporters in Beijing.

She added an agreement would be released "in due course," calling for "a sea of peace, cooperation and friendship."

Japan and China have been working to repair relations which have long been tense due in part to the legacy of Japanese imperialism.

But the two countries, who are among the world's largest energy importers, have so far failed to find a solution to the gas dispute.

China started drilling in the area in 2003, even though Japan believes that the gas fields cross the median line. Japan has previously said Beijing may be siphoning off what Tokyo considers to be its own gas reserves.

In 2004, amid sour political relations, a Chinese nuclear submarine intruded into Japanese waters near the gas fields, setting off a two-day chase on the high seas.

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