Tokyo hopes to pass the law in 2007 after an expert panel has looked into questions including the effect on human rights and a possible clash with the Japanese constitution, reports in the Yomiuri and Mainichi dailies said on Saturday.
A National Police Agency report said last month that attacks on Japan by militant Islamists could not be ruled out because of the country's close links with the United States.
Japan, a staunch supporter of the US-led war in Iraq, has about 550 troops in Samawa, southern Iraq, providing reconstruction aid.
A newspaper report last week said a member of an Islamist group outlawed in Pakistan entered Japan two years ago to try to establish a foothold in the country.
Revising immigration law
The Japanese government also plans to revise its immigration law this year to allow it to deport or prevent the entry of suspected foreign terrorists, the Yomiuri said.
Since the attacks on the United States of 11 September 2001, Japan has been mentioned by members of al-Qaida and Tokyo has tightened security sharply at public functions, diplomatic missions and military bases.
About 550 Japanese troops are
stationed in Samawa, Iraq
But some in the government feel that Japan has lagged behind Britain and the US in passing measures to prevent a possible attack, the Mainichi newspaper said.
Other elements of the law are likely to include restricting the activities of what are regarded as terrorist groups, including banning or restricting meetings and preventing members from accumulating equipment that could be used in attacks.
The only attacks on Japan in recent years have been of domestic origin.
In 1995, members of the Aum Shinrikyo sect released sarin nerve gas on an underground train in central Tokyo, killing 12 and injuring more than 5000.