A four-vehicle convoy from the Japanese Ground Self-Defence Forces encountered an explosion on Thursday as they were driving near the southern Iraqi town of Samawah, Chief Cabinet Secretary Hiroyuki Hosoda said.
There was no immediate report of injuries.
The front windshield of one of the vehicles was cracked, Hosoda told reporters. "It is not yet clear if this was a deliberate attack, and we are investigating," Hosoda said.
The Prime Minister's Office said officials have set up a task force to gather information.
Australian and British forces were working with Iraqi police in Samawah to investigate, according to Japan's Kyodo News agency.
Kyodo said the convoy had been heading to a construction site near Samawah.
Troops will suspend activities scheduled for Friday and stay inside their fortified base, a Defence Agency spokesman said.
The spokesman, who declined to be identified, said no decision had been made about the mission's future.
About 500 Japanese soldiers are
based in Samawah
An Iraqi later found an unexploded shell near the site of the blast and detained several residents living nearby for questioning, Kyodo said.
About 500 Japanese soldiers are based in Samawah, part of a total deployment of 1000 military personnel on a non-combat mission to purify water and repair infrastructure.
Japanese troops have been targeted before by cannon and mortar fire aimed at their base, but Thursday's explosion appears to be the first that caused damage.
Defence officials have called the attacks an attempt to intimidate Japan into pulling out of Iraq.
The government argued that the region was relatively stable when it deployed troops there last year in the face of widespread public opposition.