This will mark the first time the low-interest yen loans will be interrupted since Japan began extending them to China in 1979.
Chief Cabinet Secretary Shinzo Abe attributed the decision Thursday to the souring of relations between Tokyo and Beijing, telling reporters Japan needs time to consider its options.
Japanese Foreign Ministry spokesman Tomohiko Taniguchi tried to put the situation in more diplomatic terms. He says it is not a question of freezing the loan program - only that the two sides failed to exchange required documents in time for the fiscal year that starts in nine days.
"There have been reports that the Japanese government has decided to freeze new yen loans to China. That's not correct. What's correct is that we have been unable to make the exchange of notes about it," he said.
Such exchanges normally take place near the end of one fiscal year, to arrange disbursements for the next. But the two countries have not held such a meeting since March 29 of last year.
Chinese Foreign Ministry spokesman Qin Gang told reporters in Beijing Thursday his government was disappointed, and the Japanese decision would not help to improve Sino-Japanese relations.
Qin says the loans from Japan have played a positive role in China's economic and social development, but have also benefited Japan, so the arrangement has been mutually beneficial.
However, the loans have faced domestic criticism in Japan. China has a massively expanding economy, and has been increasing its military spending.
But despite its huge trade surpluses, Beijing says it needs new funds to keep its modernization on track. The official People's Daily newspaper wrote recently that China is still a developing country, and is in urgent need of capital for its many projects.
Regardless of whether new loans are agreed on later this year, the Japanese Foreign Ministry spokesman says the two nations have already agreed to end the program in the near future.
"By the time Beijing is going to host 2008 Olympic Games, the amount of new yen loans is supposed to become zero," he said.
Since the program began in 1979, the total amount of loans has exceeded the equivalent of $25 billion. China has used the money on such projects as improving its transportation infrastructure.
Sino-Japanese relations have cooled in recent years, sparked largely by Japanese Prime Minister Junichiro Koizumi's repeated visits to a controversial Tokyo war shrine.