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Russian Deputy Foreign Minister Igor Morgulov had suggested major infrastructure projects on the islands be jointly run by the two nations.
Both Japan and Russia claim the islands with the latter calling them the Southern Kurils and Japan the Northern Territories.
Because of the dispute, the two countries have not yet signed a peace treaty to end World War II.
Morgulov proposed the plans, subject to Russian legislation, to his Japanese counterpart Masaji Matsuyama during their meeting in Saint Petersburg in June.
Kyodo has quoted Japanese diplomats as saying Tokyo has apprehensions that this may undermine Japan’s claims on the islands.
“Participation of Japanese companies in joint development projects under Russian law would amount to recognition of Russian sovereignty [over the islands],” a diplomat told the agency.
The four disputed islands – Iturup, Kunashir, Shikotan and Habomai – were occupied by Soviet forces at the end of World War II.
In recent months, Russia and Japan have stepped up high-level talks between the two sides to find a resolution.
During their meeting in Moscow in late April, Japanese Prime Minister Shinzo Abe and Russian President Vladimir Putin agreed to resume negotiations on a peace treaty.
Mr Abe also met Putin on the sidelines of the G8 Summit on June 17-18 to discuss ties.
Russia and Japan will hold sub-cabinet level talks in late August to discuss the issue.
The islands will also be high on the agenda during Russian Foreign Minister Sergey Lavrov’s visit to Japan later this year.
Japan is also locked in a territorial dispute with China over the Diaoyu islands, known as the Senkaku islands in Japan.