Australia is keen to buy military submarines from Japan despite having pledged to build them at home.
The multi-billion dollar purchase could see Australia acquiring a fleet of stealth diesel engine submarines based on the Japanese Maritime Self-Defence Force's Soryu class vessels - the biggest non-nuclear submarines in the world.
The fleet of 12 4,000-ton Soryu class vessels would replace Australia's six outdated Collins-class boats by the 2030s.
"It is the best option out there," an unnamed source told Reuters, claiming that the Australian government is ready to face the backlash from the country’s defence and technology manufacturers who hoped to get a major boost from the project.
The negotiations are supposedly still in rather early stages but the sources hinted the deal could be sealed as soon as January 2015.
The sale would enable Australia to avoid the costs and risks of developing a homegrown champion from scratch, after the locally made Collins-class subs were panned for being noisy and easily detected.
A state-owned shipyard in the South Australian capital of Adelaide would handle maintenance and overhaul, which can cost as much as the purchase price over the life of the fleet.
Options under discussion run from working jointly to develop the technology, to Australia importing the engines and building the rest, to building the fleet in South Australia under licence from Japan, to - most controversially - Canberra buying finished subs designed and built by Mitsubishi Heavy Industries Ltd and Kawasaki Heavy Industries Ltd, the sources said.
A visit last week by representatives of the two Japanese companies to the Adelaide shipyards of government-owned ASC Pty Ltd - formerly Australian Submarine Corp - sparked fierce media speculation in Australia.
"No decisions have yet made on the design and build of the next generation of Australian submarines," a spokeswoman for Defence Minister David Johnston said. "It is entirely proper and prudent for the government to consider these strategic decisions through the Defence White Paper process."
Spokesmen for Mitsubishi Heavy and Kawasaki Heavy said they were not in a position to comment on the government-led talks.
If the deal is confirmed, it would represent a major expansion of Prime Minister Shinzo Abe's drive for a more active military after decades of Japanese pacifism. Abe has already loosened military exports restrictions but the sale of a whole fleet of submarines would mark the first instance of Japan selling complete weapon platforms overseas since the end of the World War Two.
Abe and his Australian counterpart Tony Abbott agreed in July to foster security and defence cooperation between the two countries, including the transfer of military equipment and technology.