Japan could sign a deal as early as September that would give it four types of rare earths from India. The deal would help Japan secure at least 60 percent of its rare earth needs from somewhere other than China, Reuters reported.

While trying to meet demand for rare earths, Japan has turned to India and Australia where it is has helped fund an Australian rare earths mine and Malaysian processing plant built by Australia's Lynas Corp.

Its search for supply security has also led to a joint venture in Kazakhstan, recycling rare earths from batteries and motor magnets, and even exploring for rare earths in the Pacific Ocean seabed. China currently produces about 90 percent of the world's rare earths.

Japan, which sources virtually all its rare earths from China, either directly or indirectly, has been trying to find new sources of supply since its neighbor held back shipments in 2010 during a row over disputed islands and then curbed global exports to preserve its own resources.

"It is critically important for Japan to secure sources of rare earths outside of China," said Akira Terakawa, deputy director at mineral and natural resources division of Ministry of Economy, Trade and Industry.

The Indian deal would provide 15 percent of Japan's needs. If Lynas is able to ramp up production as agreed, Japan could be sourcing more than 60 percent of its expected rare earths demand from outside China by 2018, based on Reuters calculations from Japanese demand data and growth figures provided by a trading house which deals with rare earths.

Japanese demand is expected to be about 18,000 tonnes a year in 2018, with Lynas supplying 8,500 tonnes a year to Sojitz and India providing 2,500 tonnes.

The Indian project, being undertaken by a subsidiary of the Indian Department of Atomic Energy and Japanese trading house Toyota Tsusho Corp, aims to produce light rare earths elements such as cerium, a Toyota Tsusho spokesman said.

The two firms are negotiating commercial conditions, but the timing of an agreement has not been settled, he said.