The trees are meant to offset some of the greenhouse gas emissions generated in Tokyo.
The Tokyo Electric Power Company signed the deal, which could cost up to £50m, with the New South Wales's forestry division to grow hard and softwood plantations to capture carbon dioxide (CO2).
But environmentalists question whether the project, scheduled to run for 10 years, will work. They claim the area is too small and that the forests must be maintained forever or the CO2 will go back into the atmosphere when the trees are processed.
The New South Wales government courted Japanese industry investment in its forests to earn lucrative credits for offsetting gas emissions, under an international scheme proposed in the 1997 Kyoto Protocol on Climate Change.
In the protocol industrialised countries agreed to reduce their 1990 level of emissions by an average of 6% by 2010. Those unable or unwilling to meet their legal obligation to reach the target would - under the credit scheme currently being finalised, though yet to be ratified by protocol signatories - have the option of paying other countries to help reduce their emissions. Planting carbon-absorbing forests would be one way to do this.
The Labor premier of New South Wales, Bob Carr, an avowed environmentalist, argued: "You've got the world's biggest privately owned power utility laying out plantations in NSW to compensate for the impact of its emissions. That is a big step."
The carbon-trading scheme, once ratified, would recognise forest expansion as one way to reduce overall emissions. But environmental experts claim such finely targeted efforts will be nowhere near enough.
"It's really good that people are starting to pay attention to the issue of global warming, but they should be conscious of the fact that there is no straightforward fix," said Chris Mitchell of CSIRO, which runs the Australian government's greenhouse research programme.
Concentration was needed on "using energy efficiently, developing new energy technologies and switching to less greenhouse-intrusive fuels".
A Greenpeace spokesman, Robbie Kelman, said massive areas of tree planting would be required to compensate for Australia's 400m tonnes of annual carbon emissions.
A company might be able to offset 5% of its emissions, he said. "But to offset just one year of Australia's emissions, we have calculated it would take an area about the size of the state of Victoria [about 23m hectares] every year."
Tokyo Power estimates that the plantations could earn it about 30,000 tonnes of carbon credits annually.
From July, the Sydney Futures Exchange will start trading the carbon credits, in a bid to become the centre of that niche's global trading. But although the New South Wales government became the first to encourage carbon trading by acknowledging the legal ownership of carbon rights in 1988, there is widespread disagreement about what the real cost of carbon dioxide will be.
Although the Koyoto protocol allows companies to buy credits or earn them by undertaking climate-friendly activities, there is no incentive to in turn spend the money generated by the acquisition of listed carbon credits on environment-friendly programmes.