The announcement came at a joint briefing after the summit talk with her Japanese counterpart Shinzo Abe on Saturday.
In a first visit by any Japanese prime minister in 14 years, Abe arrived in Dhaka around 1pm on a less than 22 hour tour.
Bangladesh and Japan were the two contenders for the non-permanent seat for 2016-2017.
But only one will be elected from Asia Pacific region.
Japan has long been trying to lure Bangladesh for its support for Tokyo's candidature.
Hasina during his Tokyo visit told Japanese media at a briefing that Japanese people would definitely get “good news” during Abe’s tour in Dhaka.
She invited him to visit Bangladesh during their meeting in Tokyo in May.
“I will have to go back and discuss the matter with my cabinet colleagues. But we will definitely value the friendship with Japan,” Hasina had then said.
“We always remember with gratitude the Japanese support… Japan is our tested friend and Bangladesh is ready to make any sacrifice for the tested friend,” she also said.
During that visit, Abe promised $6 billion development assistance for Bangladesh for the next four to five years.
In his first speech on Saturday before the summit meeting he also said he would “promote” trade and investment in Bangladesh.
Making the announcement at her office, Hasina said Bangladesh and Japan have “an excellent understanding and long history of cooperation” in the field of international affairs, including at the UN.
She gave a broad context before announcing the withdrawal of Bangladesh’s candidature.
“….in view of Japan’s continued and strong support in Bangladesh’s development process, and in the interest of solidarity and unity of the Asia-Pacific Group at the UN, it is my pleasure to declare that Bangladesh would support Japan’s candidature from the Asia Pacific Group for a non-permanent seat on the UN Security Council for the term 2016-17,” Hasina announced.
“We would also withdraw Bangladesh’s candidature in favour of Japan,” she said.
Abe thanked Hasina for the announcement.
Hasina said Japan has always been supportive of Bangladesh role in particular in the “UN Peace keeping and Peace Building”.
She recalled her May visit, and said Japan has further offered technical assistance in setting up a “Peace –Building Centre” in Dhaka for which preliminary works have already commenced.
“We deeply appreciate Japan’s offer for this cooperation as well as Japan’s commitment and contribution to establishing and maintaining global peace and stability,” she said.
Hasina said Bangladesh served on the UN Security Council “successfully” winning elections in New York with overwhelming support from friends in the years 1979-1980 and 1999-2000.
“Few years back we had launched a fresh candidature to the Security Council from the Asia-Pacific Group for the term 2016-2017.
“In 2011 our long-tested friend Japan also launched their candidature for the same term from the Asia Pacific Group.
“Since then our two governments have been closely consulting with a view to upholding our mutual cooperation and Group solidarity in multilateral fora”.
Hasina also recalled with “deep gratitude the support and empathy of the friendly people and the government of Japan during our War of Liberation”.
She said she had “a frank, warm and fruitful discussion” with her counterpart.
The prime minister appreciated Shinzo Abe for bringing Japanese businesses leaders along with him.
She also highlighted the bilateral relations, and said both sides enjoy “excellent friendly relations”.
Japan has emerged as the largest development partner of Bangladesh over the years by providing over $12 billion financial support since independence.
Hasina also referred the fresh commitment Abe made during her visit in May and said “we understand the Japanese commitment would not be limited to the amount”.
She said both countries launched “comprehensive partnership” in order to further broaden and deepen the bilateral cooperation in all areas.
Japan has also launched a programme for Bangladesh under the “Bay of Bengal Industrial Growth Belt (BIG-B)” to what, Hasina said, “help us achieve economic developments through improvement of investment climate and infrastructure”.
“I have also expressed our readiness to contribute to the Japanese construction works as well as health and nursing sectors,” she said.
Shinzo Abe in the joint press announcement expressed his gratitude to the people of Bangladesh for supporting Japan in its bid for the non-permanent seat on the UNSC.
He said this decision would “further strengthen” bilateral relations and enhance international cooperation.