China and Japan will begin negotiating a free trade agreement early next year, which will include South Korea, Reuters reported. “On a free trade agreement among Japan, China and South Korea, we’ve made a substantial progress for an early start of negotiations,” said Japanese prime minister Yoshihiko Noda after meeting with Premier Wen Jiabao on Sunday. The announcement follows an agreement last month among the three countries on an investment treaty. The two leaders also agreed to increase the use of renminbi and Japanese yen in trade transactions between the two countries. China became Japan’s largest trading partner in 2009, and trade between the two grew 22.3% in 2010 to US$339.3 billion. The Japanese government announced that it would begin buying Chinese government bonds, in a move to diversify its predominantly dollar-denominated foreign exchange reserves.