The had their ambassador propose a return to status quo ante, December 6th 1941, with the Japanese controlling the disarmament (which means NO disarmament), No war crimes trials, the Japanese government to be untouched. No occupation of Japan. The proposal was so delusional the Japanese ambassador told his own government that it wouldn't even be accepted by any neutral power to pass along. That's all in the Japanese's own records as well as wartime intercepts. No, the Japanese weren't ready to surrender, they were willing to grant the allies a "do-over" if it didn't cost Japan anything.
Technically, that was known as a "pro quo ante bellum", which is Latin for "the condition as it existed before the war". Literally a ceasing of hostilities as it existed prior to the outbreak of war but on their conditions.
And it was much more than you said, as Japan would recover any of their territory that had been lost (Okinawa, Iwo Jima, Saipan, etc), and do anything they wanted to with it. However, territory they had captured (China, Philippines, etc) would become demilitarized with Japan supervising the demilitarization and continuing to occupy them. And as you said, no war crimes trials, no occupation, no disarmament, nothing. In essence everything would end in their favor.
And they pitched this idea to multiple neutral nations in the hope that somebody would present that proposal to the Allied Powers for them. Both the Swiss and Finland outright rejected even proposing the notion, as they knew the Allies would win and proposing such a bad deal would only lower the respect of the Allied Powers towards their own nations. The only nation even willing to talk to Japan about this was the Soviet Union. Who of course had already agreed to enter the war on the Allied side and was just playing Japan for time as it made preparations for attacking themselves.
And yes, Ambassador Sato knew that the Soviets would never present the proposal to the Allies, and told Foreign Minister Togo as much. That is why I encourage everybody to actually read the Sato-Togo Telegrams, as it is an important look into the minds of the Japanese leaders of the time.
As Ambassador Sato was in negotiations, he constantly encouraged Togo to be a realist, and recognize that Japan had to surrender. That their idea of an armistice was foolish and the Soviets would never even present that. And that the negotiations had to start on the basis of negotiating the terms of the surrender, not the idea of an armistice which would never be accepted.
Sato to Togo 12 July 1945Under these circumstances, the Soviet Government might be moved, and the desire to have it mediate will not be an impossibility. However, in the above situation, the immediate result facing us would be that there will be no room for doubt that it will very closely approximate unconditional surrender.
I have expressed my extremely unreserved opinion in the foregoing and I beg your pardon for such frank statements at this time. I have also heard that at the Imperial Court His Majesty is greatly concerned. I find these dreadful and heartbreaking thoughts unbearable. However, in international relations there is no mercy, and facing reality is unavoidable. I have transmitted the foregoing to you in all frankness, just as I see it, for I firmly believe it to be my primary responsibility to put an end to any loose thinking which gets away from reality. I beg for your understanding.
And after several messages back and forth with little movement from Tokyo, Sato sent the following on 15 July 1945.
Judging from these circumstances, a peace treaty by negotiation is something which cannot win the support of the Soviet Union. In the final analysis, if our country truly desires to terminate the war, we have no alternative but to accept unconditional surrender or something very close to it.
Ambassador Sato was a seasoned diplomat. And he knew that the Soviets would never forward an armistice proposal for Japan. Therefore the only workable solution was to attempt to negotiate a surrender.
And the response to that was clear, in this cable from Togo to Sato on 17 July 1945:
In such times, we continue to maintain our war strength; if only the United States and Great Britain would recognize Japan's honor and existence we would terminate the war and would like to save mankind from the ravages of war, but if the enemy insists on unconditional surrender to the very end, then our country and His Majesty would unanimously resolve to fight a war of resistance to the bitter end. Therefore, inviting the Soviet Union to mediate fairly does not include unconditional surrender; please understand this point in particular.
Now onw thing should be made clear, nowhere in the Potsdam Declaration did it ever call for the "Unconditional Surrender of Japan". That was never-ever part of the demand. What was actually stated was this:
We call upon the government of Japan to proclaim now the unconditional surrender of all Japanese armed forces, and to provide proper and adequate assurances of their good faith in such action. The alternative for Japan is prompt and utter destruction.
Not the surrender of the nation or the government, just the armed forces. Those kinds of terms were actually common in Europe and had been for thousands of years. The surrender of a nation after a war did not mean surrendering of their sovereignty, simply the surrender of their forces in the field and their returning home with no more hostilities. However, Japan had no such tradition, and every war only had a single outcome. And that was the destruction of the losing side.
I can go on and on, but it was this cultural lock that Japan trapped itself in, and Ambassador Sato recognized. He knew what the Potsdam Declaration said, and was encouraging Togo to give him the power to negotiate a surrender that would be in keeping with Potsdam. However, back in Tokyo they culturally could not comprehend a surrender that did not completely destroy their nation.