The drop last month comes even after the United States exempted Japan and 10 EU nations from financial sanctions as they had significantly cut purchases of Iranian oil. Soon after receiving the exemption, Finance Minister Jun Azumi said Japan would continue to cut imports of Iranian oil.

European Union's restrictions on Iran, due to take effect in July, are already cutting deliveries as Japanese buyers largely rely on European insurers and reinsurers to cover their ships.

Japan will slash its crude purchases from Iran by almost 80 percent in April from the earlier months of the year, as buyers comply with sanctions that make it tough to pay, ship and insure the oil.

The ships loading in April will arrive in Japan in May or after that.

March imports from Iran totaled 355,400 barrels per day, down from 379,200 bpd in the same month a year earlier, marking a continued year-on-year decline since April 2011, government data showed on Thursday.

But the March decline in Iranian imports was significantly smaller than a 27.3 percent year-on-year drop in February and a 12.2 percent fall in January. This was partly because overall shipments in March 2011 were hit by an earthquake and tsunami that damaged several refineries and port facilities in the country's northeast.

Total March crude imports rose 6 percent on demand for reconstruction and as utilities ramped up oil and gas use to offset the drop in nuclear output following the March 2011 Fukushima nuclear disaster.

Japan's crude imports from Iran in March this year were, however, 32.8 percent higher than February's 267,700 bpd, although a month-on-month comparison may have been affected by the delay or early arrival of some cargoes.

Japan's more closely watched monthly oil data from the Ministry of Economy, Trade and Industry (METI) is due on Friday. The METI data reflecting shipments to refineries and oil terminals sometimes differ from customs-cleared trade data.

In the first three months of this year, Japan imported 323,800 bpd of Iranian crude, the custom-cleared data showed. The imports were down 22.6 percent from 418,100 bpd in the first quarter of 2011 but were up 8.2 percent from 299,300 bpd in the October-December quarter.

The United States and Europe are trying to squeeze the revenues Iran makes from its oil exports to force it to halt a nuclear program they fear will be used to make weapons but which Tehran says is for civilian purposes.

As a result of sanctions, South Korea's crude imports from Iran fell 40 percent in March from the same period a year earlier. China also halved its imports last month from a year ago due to disputes over contract terms.

Japan imported 313,500 bpd of Iranian crude oil in 2011, accounting for 8.8 percent of its total imports.

(Reporting by Osamu Tsukimori; Editing by Himani Sarkar)

• A Permanent Economic Emergency