TOKYO—Japan is set to sign an investment treaty with Iran on Friday, joining China and others in a scramble for business as sanctions on the Middle East's second-largest economy are lifted.

Iran has long been a major oil supplier for import-dependent Japan. Now it is again a potential market for Japanese products, including automobiles, aircraft and high-speed railways. The treaty will set the terms for future investment and trade.

A landmark U.S.-led agreement reached last year between Iran and six world powers came into effect last month, ending years of sweeping sanctions over Iran's nuclear program. The deal will reopen international markets to Iranian oil and end many restrictions on doing business with Iran and hundreds of Iranian companies.

China is among the countries best-positioned to benefit from the lifting of sanctions against Iran—both as a buyer of cheap Iranian oil and as a seller of much needed infrastructure. While Beijing never officially recognized U.S. sanctions against Tehran, many of its state-owned companies curbed trade with Iran to avoid the risk of penalties from the U.S.

Chinese leaders view Iran as a key part of China's "new Silk Road" vision. The initiative aims to boost Chinese investment and trade from Central Asia to Europe, part of a bid to export vast overcapacity in sectors like steel and to support jobs at home in China.

President Xi Jinping visited Tehran last month, signing a series of economic cooperation agreements, including a deal to finance construction of a high-speed railway.

Mr. Xi's visit heightened a sense of urgency in Tokyo. Japan is concerned that China will end up dominating trade and natural-resources markets across the Eurasian continent. To check China's rapid expansion, Prime Minister Shinzo Abe visited Central Asia in October and signed a raft of infrastructure deals.

South Korea is also seeking to increase business with Iran, and expects to sign a range of agreements following ministerial-level meetings scheduled to be held in Tehran later this month.

Finance Minister Yoo Il-ho said last month that South Korea aims to at least double exports to Iran in two years. Last year, its exports to Iran totaled $3.76 billion, down by nearly half from $6.30 billion in 2012.

South Korean officials and business leaders see opportunities in areas such as automobiles, construction, steel and oil refineries. Hyundai Motor Co. and Kia Motors Corp. are among the companies that say they are seeking to resume partnerships or expand businesses in Iran.

Japanese businesses, many of which have a long history in Iran, hope to revive operations there. Suzuki Motor Corp., Nippon Steel & Sumitomo Metal Corp. and oil company Inpex Corp. are among those seeking opportunities.

"Japan is already late to return to Iran, but there are still countless opportunities," Fereidun Fesharaki, chairman of energy consultancy FGE, told a packed room of officials from Japanese companies such as electronics group Hitachi Inc. and auto maker Nissan Motor Co. on Wednesday.

Iran is another country where Tokyo and Beijing are competing to build high-speed railways. Speaking in Tokyo on Friday, Ali Tayebnia, Iran's minister for economic affairs and finance, said developing his country's rail and road networks is at the top of the government's priorities.

Japanese officials reiterated that no concrete deal has been reached between Iran and China on the development of a high-speed rail, and that Tokyo isn't behind Beijing in the race for contracts.

One possible target for Inpex, Japan's biggest oil developer, is Iran's Azadegan oil field, one of the world's largest untapped fields. Inpex held a 75% stake in the field before withdrawing in 2010 due to the U.S. sanctions.

China National Petroleum Corp. stepped in after Inpex left, but Tehran reportedly scrapped the tie-up with China. Inpex is considering bidding for the field in partnership with western majors such as Total SA or Royal Dutch Shell PLC.

But Inpex and other Japanese companies remain cautious, citing uncertainties about Iran's political and investment environment, as well as the prolonged slump in oil prices.

"The economic conditions have to be right," Masahiro Murayama, managing executive officer at Inpex, said at a news conference Thursday. "There are still many unknowns."

Inpex slashed its annual outlook earlier this week and is bracing itself for further write-downs resulting from lower oil prices.

Business with Iran still carries risks. Many Iranian companies and individuals remain on U.S. and European Union sanctions lists. Doing business with them, even unknowingly, could raise trouble. Japanese banks are wary after Bank of Tokyo-Mitsubishi UFJ, the country's largest banking group, was forced to pay $250 million in penalties to U.S. regulators in 2013 for its alleged involvement in transactions with Iran.

The support of Japanese banks is critical for domestic companies seeking to push into Iran, said Henry Smith, associate director at consultancy Control Risks, who helps Japanese companies assess business risks in the Middle East.

Another challenge is safeguarding investments when disputes arise. The bilateral investment treaty will lay out options for settling disputes through international mediation, but Iran's nonparticipation in the World Bank-based dispute-settlement mechanism keeps quick resolution out of reach for Japanese investors.

In-Soo Nam in Seoul contributed to this article.

Write to Mitsuru Obe at mitsuru.obe@wsj.com and Mayumi Negishi at mayumi.negishi@wsj.com

(END) Dow Jones Newswires

February 05, 2016 02:05 ET (07:05 GMT)