Japan has accused China of starting production at a controversial gas field in the East China Sea.
Japan and China are both eager to exploit gas deposits
Japan's Trade Minister Shoichi Nakagawa said flames had been seen at a Chinese development in the area.
Japan and China have frequently clashed over drilling rights in the oil and gas-rich region, due to a long-standing disagreement over their sea borders.
The energy dispute is just one of a host of issues to strain Japan-China relations in recent months.
According to a UN convention, both countries can claim an exclusive economic zone (EEZ) extending 200 nautical miles (370 km) from their shores.
But China claims its EEZ on the basis of its continental shelf, which extends into Japan's claimed area.
China and Japan's exclusive economic zones (EEZs) overlap
Japan claims EEZ extends 200 nautical miles from its shore, while China claims EEZ extends to edge of its continental shelf
Two countries have never agreed a maritime border
The UN says it will arbitrate by May 2009
Also dispute ownership of Senkaku/Diaoyu islands
Mr Nakagawa told a news conference on Tuesday that China had begun extracting either oil or natural gas at its controversial Tianwaitian site.
"What was confirmed was that flames have begun burning on top of a chimney," a spokesman quoted him as saying.
Japan says the Tianwaitian field, while within China's EEZ, is very close to Japan's zone.
Japanese officials are worried that drilling in the area may tap into deposits on the Japanese side of the line.
The two nations have argued many times over the issue of drilling rights in the East China Sea.
In July, China protested against Japan's decision to give exploration rights to the Japanese company Teikoku Oil - the first time Japan had taken such an active step to exploit the area's reserves.
Teikoku Oil asked for the rights in April, after Tokyo signalled a change in policy to allow test drilling.
China began test drilling in the region in 2003.
The two nations have also clashed over other issues this year.
In April Tokyo approved a set of controversial history textbooks, which critics say whitewashed its record during World War II.
The move triggered rare public rallies in China - which analysts say had Beijing's tacit approval. Angry Chinese protesters marched in several major cities and targeted Japanese buildings.
Further disputes followed, over Japan's quest to gain a permanent seat at the UN Security Council, as well as ongoing compensation requests for Chinese survivors of Japanese atrocities during the war.