The cells would be a by-product of fertility research
The decision by a bioethics panel is likely to be approved by the government later this month.
Strict guidelines would control researchers' work. They would not, for example, be allowed to use cloning techniques to create the stem cells.
The Japanese announcement follows a vote on Tuesday in the United States House of Representatives to ban all forms of human cloning, even for medical research purposes.
Cloning technology
The Japanese cabinet's bioethics panel rubberstamped a set of conditions on stem cell research that is expected to be formally approved by the Science and Technology Agency later this month, an official of the cabinet's Council for Science and Technology Policy said.
The guidelines set out how embryonic cells can be used in scientific study. Only those cells retrieved from the discarded embryos made in fertility research will be deemed acceptable.
Japanese scientists would not be allowed to use cells that were "harvested" from embryos that had been made using cloning technology.
Human embryonic stem cells are the master cells that go on to produce all other cell types in the body. Scientists hope that by learning to control the processes involved they can make cells and tissues for transplant into diseased patients.
The application of cloning techniques is seen, by some, to be necessary if the replacement cells are to have the best chance of surviving an immune response from the patient.
Organ transplants
The council's spokesman said that if final approval was given for the guidelines, scientists could probably start stem cell research by the end of the year.
"It depends on when exactly the approval process is completed," he said. "But there are several research institutions that are already anxious to start work. If full approval comes by September, it would take about two or three months after that to review applications to start research."
The progress of medical research is often controversial in Japan - just as it is in many other countries around the world. Organ transplants from brain dead patients have only recently been permitted, and it was only in May this year that Japan saw its first birth from a surrogate mother.
However, Japan has been taking a leading role in animal cloning studies, with its researchers claiming several world firsts.