The aid, to be targeted at areas such as electricity, education, water and employment, will help rebuild Iraq's infrastructure and improve security, a government statement said.
"We will provide a total of $1.5 billion in grants as near-term aid for Iraq's reconstruction," it said.
"In addition, our country intends to conduct aid for medium term reconstruction and we are aiming to announce that at the Madrid donors meeting."
An international donors' conference for Iraq will be held in the Spanish capital on 23 and 24 October.
The statement has said Iraq's reconstruction is vital not only for peace and stability in the Middle East, but is important to the national interests of Japan, which relies on the Middle East for about 90% of its oil.
Japan depends on Middle East oil
The sum offered is far less than the $11 billion Japan gave for the 1991 Gulf War, but compares with $920 million offered by Britain and $105.6 million from Spain.
US President George Bush will hold talks in Tokyo with Japanese Prime Minister Junichiro Koizumi on Friday, at which the issue of Japan's contribution to rebuilding Iraq will be high on the agenda.
Koizumi, whose ruling party faces an election on 9 November, has been wary of appearing to be at Washington's beck and call and of worrying Japanese voters, who are concerned about sending troops to Iraq.
Japanese media have said total aid for Iraq will come to about $5 billion, switching from grants to loans in 2005 when Iraq is expected to have enough oil revenues to repay loans.