Japan will forgive about 690 billion yen (US$5.9 billion; -5 billion), or 80 percent of the roughly 860 billion yen (US$7.3 billion; -6 billion) owed it by Iraq.
Iraq will repay the rest over 23 years, with a six-year deferment, Kyodo said, citing unnamed Foreign Ministry officials.
The two countries are expected to conclude a formal agreement by the end of the year, the report said.
Officials at the Foreign Ministry were not available for comment Sunday.
Settling the existing debt will enable Japan to provide government loans of up to US$3.5 billion (-3 billion) to Iraq beginning next March to help with postwar reconstruction, according to Kyodo. Japan suspended government loans to Iraq in the mid-1980s after war broke out between Iraq and Iran in 1980.
The decision to forgive the debt follows an agreement in November last year by the Paris Club of 19 creditor nations to write off Iraq's foreign debts.
The Paris Club _ which as well as its European members includes the United States, Japan, Russia, Canada and Australia _ agreed to an 80 percent reduction in the US$38.9 billion (-33 billion) owed by Iraq.
The U.S. last year forgave Iraq 100 percent of its debt of US$4.1 billion (-3.4 billion). Japan is the largest creditor in the Paris Club, and the bilateral agreement is likely to help expedite Iraq's negotiations with other creditor nations, Kyodo News agency reported. V.A.