Japan says it will suspend sanctions it slapped on Pakistan and India three years ago over nuclear testing.
The lifting clears the way for fresh economic aid in a show of support for the two nations during the U.S.-led strikes on Afghanistan.
Tokyo joined a slew of other countries that imposed sanctions on the two South Asian foes after they carried out tit-for-tat nuclear tests in May 1998.
At the time Japan froze all new loans and grants except for humanitarian aid.
But on Friday Chief Cabinet Secretary Yasuo Fukuda said Tokyo would suspend the economic measures it took against the two countries.
While stopping short of announcing fresh aid, Fukuda said Tokyo would look at specific economic steps to help ensure stability in the two south Asian countries.
Pakistan is playing a key role in supporting the U.S.-led effort to root out prime terrorist suspect Osama bin Laden from neighboring Afghanistan.
Fukuda added that Tokyo also expects India to play a big role in the war against terror.
In making Japan's case, Fukuda stressed that both countries had stuck to self-imposed moratoriums on nuclear testing declared shortly after the test blasts.
But Japanese officials said they wanted to call the lifting of the sanctions a "suspension" to leave the way open for Japan to revive punitive steps if Pakistan and India scrap their moratorium.
Some politicians in the dominant Liberal Democratic Party are opposed to lifting the sanctions. They say it runs counter to Japan's policy of seeking nuclear non-proliferation.
"Japan, the only country in the world to have suffered atomic bombings, has an especially strong feeling about nuclear non-proliferation," a senior Japanese Foreign Ministry official told Reuters news agency.
Following Islamabad's decision to support the U.S.-led coalition's campaign against terrorism, Tokyo pledged to give $40 million in assistance to Pakistan.
Japan has also said it would reschedule some 64.6 billion yen ($525.7 million) of Pakistan's debt, according to Reuters.
The United States, for its part, has given Pakistan $100 million in aid and rescheduled $379 million of debt.
The House of Representatives last week also gave its final approval to authorize the waiver of sanctions for two years.
Pakistan has said the crisis may cost it up to $2.5 billion, and officials have held talks with the United States and other donors on possible debt relief and fiscal support.