Putin made the comments on Wednesday during an economic forum in the eastern Russian city of Vladivostok, where he met Japanese Prime Minister Shinzo Abe.
"An idea has just come into my head. Let's conclude a peace treaty before the end of this year, without any pre-conditions," Putin said during a question-and-answer session at the forum, prompting the audience to break into applause.
The dispute between Russia and Japan started more than seven decades ago, with the Soviet Union occupying the strategically located Kuril chain of islands during the last days of World War II in 1945.
Both nations have laid claim over the group of four islands - known as the Southern Kurils in Russia and the Northern Territories in Japan - thereby preventing them from signing a peace accord.
Abe did not respond to Putin's remarks, but his Chief Cabinet Secretary Yoshihide Suga later said the territorial claim by the two countries needs to be resolved before any treaty is signed.
"I don't want to comment on what President Putin said... However, our position that the Northern Territories issue should be resolved before any peace treaty remains unchanged," Suga said.
Former Russian Deputy Foreign Minister Georgy Kunadze said he doubted Putin wanted to solve the territorial problem in earnest.
"This is called trolling. Putin does not expect anything," Kunadze told the Echo of Moscow radio station, adding Abe would never accept the deal.
Alexander Gabuev, from the Carnegie Moscow Center, suggested Putin's proposal was a sign of frustration over the decline in Japanese investment.
"This appears to be just emotions and an attempt to put pressure rather than anything real," he said.
Putin and Abe have held several meetings in the past in a bid to solve the dispute over the islands.
Last year, Japan decided it would expand its missile capabilities in the strategic region, a move that worried Russia.