Putin's historic proposal came just two days after he said that the two countries' territorial dispute was unlikely to be settled soon.
It kept the two countries from signing a peace accord.
"We have been trying to solve the territorial dispute for 70 years. We've been holding talks for 70 years," Putin said at an economic forum in the far eastern city of Vladivostok attended by Japanese Prime Minister Shinzo Abe and China's Xi Jinping.
"Shinzo said: 'let's change our approaches.' Let's! Let's conclude a peace agreement, not now but by year's end without any preconditions," Putin said, with the audience breaking into applause.
Putin said the conclusion of such an agreement would allow the two countries to "continue to solve all outstanding issues like friends." "It seems to me that this would facilitate the solution of all problems which we have not been able to solve during the past 70 years." The Japanese prime minister for his part said the two countries "have a duty to future generations."
"Let us walk together mindful of the questions 'If we don't do it now, then when?' And 'if we don't do it, then who will?'" Abe said. "We are both fully aware that it will not be easy." On Monday, Putin seemed to pour cold water on suggestions that the dispute could be solved soon.
"It would be naive to think that it can be solved quickly," Putin said after meeting Abe on the sidelines of the forum Monday.
Putin and Abe have held numerous meetings over the past few years in a bid to solve the dispute over the islands known in Japan as the Northern Territories.
The two leaders have launched various economic projects on the islands in areas such as the farming of fish and shellfish, wind-generated energy, and tourism.
Since last year, the countries have also agreed on charter flights for Japanese former island inhabitants to visit family graves there.
(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)