"Let's conclude a peace agreement, not now but by year's end without any preconditions", Putin said, prompting the audience to break into applause.
A treaty without preconditions would leave Russian Federation in control of the disputed islands, which Russian Federation calls the Southern Kuriles and Japan calls the Northern Territories.
Japan said that before any peace deal with Russian Federation is signed, the south Kuril Islands dispute must first be settled.
He made the remarks while meeting Japanese Prime Minister Shinzo Abe at the Eastern Economic Forum in Russian Federation.
Russian and Japanese Foreign Ministry officials said that work on a future agreement would continue as usual, and a Japanese official made clear that Tokyo wants an agreement on possession of the islands before it will sign a peace treaty.
The two countries are in dispute over the four southernmost islands in the Kuril chain, known in Japan as the Northern Territories, which the Soviet Union occupied at the end of World War II but are claimed by Japan.
But the two leaders found time to flip blini on "Far East Street", an exhibition of the region's cultural and economic achievements.Photos showed Putin and Xi, wearing blue aprons, pouring out batter and turning the pancakes over before eating them with caviar and a shot of vodka.
It kept the two countries from signing a peace accord.
Xi and Putin had their third meeting in four months, charting the future course of the China-Russia comprehensive strategic partnership of coordination and exchanging views on major worldwide and regional issues, Wang said. "Putin does not expect anything", Georgy Kunadze, a former Russian deputy foreign minister, told AFP news agency, adding that Abe would never accept a deal that would be political suicide for him.
Russian Federation and Japan did not sign a formal peace treaty after the end of WWII in 1945, and the absence of an agreement has strained relations ever since.
A Japanese government spokesman said the country's stance had not changed. Last year, Tokyo launched a complaint over plans to lay an undersea telecom cable, linking the three disputed islands with Russia's Sakhalin Island.
He also made clear that they should fight unilateralism and trade protectionism worldwide, .in an apparent response to the Trump administration's trade policies.
On Monday, Japan's Prime Minister Abe said he was ready to provide financial aid to Pyongyang on condition that it resolves the issues of its nuclear and missile tests and abducted Japanese nationals. "We have been negotiating for 70 years", Putin said.
Relations between China and Japan soured in 2012 over a territorial dispute over several tiny islands in the East China Sea.