Given gasoline-oriented Japan's limited diesel consumption and lack of incentives, however, the take-up from consumers and refiners is likely to be tepid at first, officials conceded.

"The legislation is expected to be passed by the end of this year, and the law will become effective by the end of this fiscal year (to March 2007)," an official at the Agency for Natural Resources and Energy, a unit of the trade ministry, told Reuters.

Japan now allows oil companies to blend about 3 percent of ethanol, another biofuel produced from crops such as sugar or corn, into gasoline, the motor fuel of choice for most drivers.

It does not have rules to regulate biodiesel quality, deterring potential retailers from offering it and limiting its use to voluntary efforts by some local municipalities using waste vegetable oil for public transport, officials say.

Tokyo will not require retailers or refiners to blend a minimum percentage of pure biodiesel into their motor fuel, as some nations and governments have done. But it may consider tax incentives in future to encourage consumers to use biofuels, said the official, who asked not to be named.

The government will also offer financial support for companies that are developing ethanol blending technologies.

Faced with opposition from its powerful refiners and limited domestic crops, Japan has been slow to join the biofuel demand boom, which got a boost this year when US President George W. Bush made it a cornerstone of his energy policy.

Oil prices that stay stubbornly above US$70 a barrel have also made alternatives more economic, while a global push for cleaner fuels has aided momentum toward the cleaner fuel.

But for the moment, no bio-transportation fuel -- diesel or gasoline -- is sold at pumps at Japanese gas stations at all.

Malaysian Golden Hope Plantations Bhd.'s first export cargo of biofuel is due to be shipped to Japan this month, although Europe is expected to be the top market.

HIGH HOPES, NO INCENTIVES

Japan hopes to replace about 500,000 kilolitres (3.14 million barrels) of transportation fuels with bio-ethanol a year by 2010, another official said, but did not say how it would achieve that goal, which is less than 0.2 percent of Japan's total oil demand.

"Writing up the specifications of biodiesel can define the standard quality of the fuel and help introduce the industry and consumers to biodiesel," the official said.

Refiners feared that bio-blended fuels could damage cars and oil production systems, although proponents say that as much as 10 to 20 percent of biofuel is safe in standard engines.

There are signs they are coming around, if slowly.

Japan's largest refiner Nippon Oil Corp. is working with auto giant Toyota Motor Corp. to develop commercial biofuel, but is not expecting immediate results.

"We do not have a fixed timetable but the industry as a whole targets at 2010," a spokesman for Nippon Oil said.

The Petroleum Association of Japan, the industry's lobby, said earlier this year it hoped a gasoline blended with 3 percent of ethyl tertiary butyl ether (bio-ETBE) would meet about 20 percent of the country's total demand by 2010.

Diesel is mostly used to fuel trucks and buses in Japan, with demand totalling 37.34 million kl (643,000 barrels per day) last year. Gasoline demand was 61.6 million kl (1.1 million bpd).

While countries like Thailand and the United States enjoy double benefits from biofuel -- curbing oil imports and lifting rural incomes -- Japan is unable to feed itself, meaning it must still relay on crops in Malaysia or Brazil to provide it with most of its imported biodiesel or ethanol.

But officials see limited demand for the time being.