In a move which could fuel tension between China and Japan, Japan has agreed to buy the disputed islands from their private owners, Japanese media reported.
The Japanese government will spend 2.05bn yen (£16.4m) to buy the uninhabited islands known as Senkaku in Japan and Daioyu in China from their Japanese owners, the Kurihara family, Japanese dailies, Asahi Shimbun and Yomiuri Shimbun, reported.
A contract for the purchase will be signed soon and cabinet approval for the nationalisation of the island is expected by mid-September.
Deputy chief cabinet secretary Hiroyuki Nagahama has already met the owners and struck a deal to buy three of the five main islands including the largest island, Uotsurijima, said Yomiuri.
Japanese prime minister Yoshihiko Noda plans to formally convey the move to the Chinese on the sidelines of the UN General Assembly meeting but a Japan-China meeting is yet to be finalised, according to the Asahi report.
The plan to buy the island was part of an earlier proposal made by Shintaro Ishihara, Tokyo's outspoken nationalist governor, in April.
Recently, Japanese officials conducted a survey of the waters around the islands to assess the scope for fishing and possible developmental prospects in the region.
The island is located south of Okinawa and north of Taiwan and is believed to be rich in natural resources and untouched fishing areas. It is controlled by Japan but China and Taiwan also raise claim to the territory which lies near major shipping lanes.
Beijing has asked the US not to involve itself in the row to which its allies Japan and Philippines are parties. US Secretary of State Hillary Clinton is set to start her China tour which is expected to stress on the need to maintain peace in the region.
The latest flare-up in the territorial row began in August with Chinese and Japanese nationals trying to storm the islands to stake claim to the territory in the name of their respective countries.
Japanese authorities arrested and deported a group of Chinese and Hong Kong residents who tried to lay siege to the island.
The incident followed a group of Japanese activists entering the island and waving Japanese flags. Later, two Chinese men were arrested for tearing the Japanese flag from the car carrying the Japanese envoy in Beijing.