The plan is aimed at saving Tokyo Electric from collapse by having the state initially shoulder the massive compensation costs, which the power company will repay over several years via special dividends, the paper said.
Asia's largest utility, also known as TEPCO, has yet to determine how much it will have to pay residents and business near the Fukushima plant, who were forced to evacuate after the March 11 earthquake and tsunami caused deadly radiation leaks.
JP Morgan has estimated TEPCO could face 2 trillion yen ($24 billion) in compensation losses in the financial year that started this month, while Bank of America-Merrill Lynch has said the bill could reach $130 billion if the crisis drags on.
TEPCO President Masataka Shimizu said on Friday the initial compensation payment would total 50 billion yen, but said he didn't know what the final bill would come to.
Facing a sometimes hostile news conference, Shimizu said the power company would look to streamline its operations and cut costs. Shimizu bowed and apologised to reporters, some of whom were visibly upset and shouted at the executive.
Chief Cabinet Secretary Yukio Edano told a news conference on Friday payments could be set at about 1 million yen per household, with all of those living in a 30 km radius of the plant eligible.
More than 200,000 people were living in the 30 km Fukushimi exclusion zone before the disaster.
Edano said the government wanted to start paying some of the victims before the "Golden Week" national holidays that start on Friday, April 29.
Under the draft plan as reported by the newspaper, the government would set up the fund using loans from private banks -- which it would guarantee -- and surcharges on other utilities that operate nuclear plants.
The fund would handle the initial compensation payments, which TEPCO would repay over the next several years by issuing new preferred shares to the fund that will pay dividends, the paper said.
Without such government support, TEPCO would likely face having its debt rating cut to below investment grade, meaning some pension funds and other institutional investors would no longer be able to hold the utility's bonds.
What is not yet clear, however, is how much TEPCO will have to ultimately pay in compensation, which would help determine the outlook for its credit rating, said Hiroki Shibata, an analyst at Standard & Poor's in Tokyo.
"How much TEPCO will have to pay or how much other Japanese utilities will have to pay and when is still unknown," he said.
Shibata said he would be watching closely later on Friday the results of a first meeting of a government-formed panel to assess the amount of compensation TEPCO and the state will pay.
TEPCO shares slid 5.6 percent to 472 yen as of 0403 GMT, on concern shareholders would be further squeezed by the plan. The stock has lost more than three-quarters of its value since the disaster.
Spreads on TEPCO's credit default swaps, contracts that insure its debt against default, narrowed, reflecting bondholder relief at the potential of government backing.
The CDS on the utility's 5-year senior debt was traded around 340 basis points on Friday, market sources said, compared with around 400 basis points a day earlier.
That put the cost of insuring $1 million of TEPCO's debt against default at $34,000, compared with $40,000 a day earlier.
"This scheme would be one step forward from where we were. Until now we were not clear how TEPCO would fund the compensation for victims of the nuclear accident," said Deutsche Securities credit analyst Akihito Murata.
"So in that sense this would be positive. But we have to keep in mind that how TEPCO would be funding costs to cover damages at the plant itself is a separate matter.
The new fund would also provide insurance against future nuclear disasters, charging annual premiums from TEPCO and other power companies with nuclear reactors, the Nikkei said.
The government would decide the size of TEPCO's dividend payout every year based on the state of the company's finances, the business daily added.
The Yomiuri newspaper reported on Thursday that a plan was being considered within the government to cap TEPCO's liability at 2 trillion to 3.8 trillion yen through a scheme that would draw on funds from the government and other utilities.