Australian Prime Minister John Howard announced that Australia and Japan will start negotiations on a free trade agreement (FTA) early next year, according to local media reports Wednesday.

Howard made the announcement after finalizing details with his Japanese counterpart Shinzo Abe during a phone call Tuesday night.

"Next year negotiations for a free trade agreement between Australia and Japan will commence," Howard told reporters in Sydney, Australia's largest city.

He said no deadline had been set to conclude the deal, which must consider Japan's long standing sensitivity to agricultural imports.

"We have agreed that everything will be on the table, including agriculture," he said, adding "we recognize that (agriculture) is very sensitive to the Japanese."

Japan is highly sensitive to Australian calls to open up its protected farm sector which features tariffs of 360 percent on butter, 218 percent on slim milk, 777 percent on rice and 251 percent on wheat, the reports said.

Australia has predicted the FTA could add as much as 40 billion Australian dollars (3.1 billion U.S. dollars) to the gross domestic product.

Meanwhile, the deal will bring the possibility of Japan's easier access to Australia's vast energy supplies, most notably uranium.

Japan is Australia's largest trading partner, with two-way goods and services trade worth 53.9 billion Australian dollars (42 billion U.S. dollars) in 2005-2006 financial year.