It's welcome news for the prime minister who came under pressure in last week's leadership ballot from his South Australian colleagues over the issue.
When Tony Abbott and Japanese Prime Minister Shinzo Abe met last year, Japan was clearly the Australian Prime Minister's preference for one of Australia's biggest ever defence deals.
A deal with Japan would represent an important show of deeper security ties between the two nations and an active demonstration of Japan's new stronger regional military posture.
The new fleet of up to 12 submarines to replace Australia's Collins Class will be worth between $20 and $40 billion.
In response to Opposition accusations of a secret deal between the two leaders, Sky News has been told there is no agreement in place.
The decision has been complicated by domestic political pressure on Tony Abbott after he agreed to open the door to the Australian Submarine Corporation to bid for the project.
Under any future deal the ASC is likely to partner with a foreign supplier.
Sky News understands Japan is willing to partner with the ASC even though this would require sharing sensitive military technology in an unprecedented manner.
Japan has expressed it doesn't favour a tender or a competitive evaluation process in which it would compete against European companies.
Instead, the clear preference would be for Australia to make a decision in favour of Japan before the Abe government decides how much of the build and the technology it is willing to share.
David Speers travelled to Japan as courtesy of the Japanese Trade Ministry.
The Japan Maritime Self-Defense Forces Soryu (SS-501) diesel-electric attack submarine.