Glory said they also had an option to sign the former Brisbane Roar and Melbourne Victory attacking midfielder on a permanent basis.
Nichols, 25, has made 137 A-League appearances, scored 26 goals and won two A-League championships with Roar, under current Australia coach Ange Postecoglou. He has made only ten appearances for Cerezo Osaka since signing for the J-League club in the January 2014 transfer window.
Nichols has made four international appearances for Australia. "I'm really looking forward to returning to the A-League. I had options to stay in Japan and even go to Europe on loan, however I wanted to come back to the A-League," he said.