Japan will resume economic aid to Pakistan which was suspended after Pakistan held nuclear tests in 1998.
Koizumi sought assurances over nuclear proliferation
Japanese Prime Minister Junichiro Koizumi said the yen-dominated loans worth $154.9m would boost economic aid for Pakistan.
Most of the loan money would go into repairing a canal system in the eastern Punjab province, officials said.
Japan had imposed severe economic sanctions on both Pakistan and India after their 1998 nuclear tests.
Japan lifted the sanctions on India in 2001.
Mr Koizumi, who arrived in Pakistan for a day-long visit from India, held talks with both President Pervez Musharraf and Prime Minister Shaukat Aziz.
The issues ranged from economic co-operation to counter terrorism and nuclear non-proliferation.
Prime Minister Koizumi was expected to announce the resumption of yen-denominated loans to Pakistan.
"Today we decided to resume yen loans to Pakistan... This is a reflection of our will to forge closer and more friendly relations between the two countries," Mr Koizumi told reporters after holding talks with the Pakistani leaders.
Japan also agreed to extend a total of $79.24m in grant aid for two water projects in Pakistan.
This was part of $300m of grant aid Japan pledged to Pakistan four years ago, reports said.
Mr Koizumi said the loans would boost economic aid
The two countries also issued their first-ever joint statement after 53 years of diplomatic ties.
"Pakistan and Japan have common interest in the future of Asia with special focus on counter-terrorism, non-proliferation, economic co-operation and the propagation of democratic values," the countries said in their statement.
Pakistani officials said that Gen Musharraf had told Mr Koizumi that Pakistan now has a foolproof system in place to prevent proliferation.
Mr Koizumi left Pakistan on Sunday for Luxembourg with talks with the European Union officials, officials told the Associated Press.