Exclusive - Japan eyes military aid to spur defence exports, build security ties: sources

By Tim Kelly and Nobuhiro Kubo

TOKYO (Reuters) - Japan is considering creating a government-backed financing arm for weapons exports, a move that would accelerate Prime Minister Shinzo Abe's shift away from the country's pacifist past and strengthen Tokyo's regional security ties as China's military power grows.

As a first step, the government plans to convene an advisory panel to consider specific proposals to create a way to finance military sales by Japanese firms and fund defence industry cooperation abroad, four people involved told Reuters.

One possibility to be considered is for a government-backed body to provide concessional financing for military projects modelled on the self-financing Japan Bank for International Cooperation (JBIC) and the Japan International Cooperation Agency (JICA), said the people involved.

They asked not to be identified because of the sensitivity of talks on a move that would likely upset China, where memories of Japan's wartime past run deep and which has already criticized Abe's decision in April to end a decades-old ban on arms exports.

Japan's Defense Ministry declined to comment. "We are considering a number of options in regard to defence equipment, but as of yet, nothing has been decided," a spokesman said in response to a question from Reuters.

Abe dissolved parliament last week and called lower house elections for Dec. 14, which his Liberal Democratic Party and its coalition partner are expected to win.

The advisory panel would meet after the election. It would comprise about 10 members, including a legal and a banking expert as well as academics and defence industry executives, people involved said.

"The panel will look at everything from finance to finding deals, the negotiating process and maintenance and support," one of the sources said.

JBIC issues its own bonds to finance energy projects. Overseen by the Finance Ministry it also helps Japanese industrial firms expand abroad by providing loans for overseas customers to buy Japanese machinery.

JICA is the Foreign Ministry's main conduit for dispersing much of the nation's $17 billion (10.7 billion pounds) in annual overseas development aid. The agency builds schools and hospitals and finances agriculture and health projects, with Japanese engineers, nurses and other experts often involved.

Other ideas under consideration include adding a financing arm to a defence procurement agency planned for next year or to expand JBIC's remit to cover military projects.

Kawasaki Heavy Industries, which builds aircraft and submarines, last year told Reuters it had approached JBIC about possibly financing foreign sales of a civilian version of its C-2 military transport plane.

SUBMARINES TO SEAPLANES

A number of potential deals under discussion in recent months could benefit from concessional financing from Tokyo.

They include a possible sale of state-of-the-art submarines to Australia, US-2 patrol seaplanes to India and the development in Japan with foreign companies of a troop carrying helicopter.

Defense bureaucrats are also looking at joint development projects with Southeast Asia that would build military industrial ties that in turn would strengthen security cooperation and act as a counterweight to China.

Such officials have already travelled to Indonesia and Malaysia to assess the potential for deals, the sources added.

Abe's government in September also invited representatives from the region to a seminar in Tokyo to promote defence industry cooperation. The diplomats were taken to a shipyard near Tokyo building minesweepers, according to one of the delegates who spoke to Reuters.

Despite the enthusiasm from Abe's government, many Japanese corporations have been reluctant to push into overseas deals for weapons systems, people involved say.

Mitsubishi Heavy Industries at the start of the year entered a tentative agreement to build a rear fuselage component for Britain's BAE Systems, one of the companies building the Lockheed Martin Corp F-35 stealth fighter.

Talks, however, collapsed because the Japanese firm was worried about potential losses on a tightly priced deal without government backing.

In Japan's highly fractured defence industry, few companies rely on military sales for more than a few percent of income and firms that make military equipment rarely publicize such business lines.

Among them: ball-bearing maker Minebea also makes 9 millimetre pistols. Daikin Industries, a leading maker of air conditioners also fabricates rifle grenades, and Komatsu Ltd, which sells its yellow excavators around the world, builds armoured vehicles.

"It's not up to us to promote our defence business, the government has to decide what it wants to do, and it has to be something that Japanese citizens are comfortable with," Hideaki Omiya, chairman of Mitsubishi Heavy, told Reuters in October. "We are not proactively going overseas to sell our products."

(Editing by Dean Yates)