* Budget carrier AirAsia Japan to start flying in about a year
* Carrier, with $69 mln initial capital, to start with 5 Airbus A320
* Return of AirAsia to Japan to stir up competition in budget sector
* Rakuten to boost its online travel services via venture (Adds more details on venture, context on airlines)
By Teppei Kasai
TOKYO, July 1 (Reuters) - AirAsia Bhd said on Tuesday it would set up a low-cost airline with Japan's biggest online retailer Rakuten Inc and other firms, marking the budget carrier's second attempt to tap one of Asia's lucrative air travel markets.
The new carrier, AirAsia Japan, will have an initial capitalisation of 7 billion yen ($69 million) and will start flying in about a year with a fleet of five Airbus A320 aircraft, the carrier's CEO, Yoshinori Odagiri, told reporters.
The airline will fly to both domestic and international destinations, but has yet to decide which airport it will be its base, he added.
For Malaysian-based AirAsia, the venture with businesses not involved in the airline industry is another attempt to expand to Japan after it pulled out of a partnership with the country's biggest carrier ANA Holdings Inc last year.
That venture, launched in 2011, failed to woo travellers and ANA blamed poor marketing and a user-unfriendly website. The airline has since been rebranded into Vanilla Air, and is now wholly owned by ANA and based out of Tokyo's Narita airport.
"For AirAsia, the rationale is that if they can bring down the costs and they can undercut the competitors, they can make a lot of money because there is still a lot of room to grow," said Tan Kee Hoong, an analyst at Alliance DBS Research in Kuala Lumpur.
"Now that their partners are non-airline companies, the joint venture partners will leave more of their strategy as well as the operational decision to AirAsia."
Rakuten, controlled by Japan's fourth-richest man Hiroshi Mikitani, aims to boost its online travel site through the partnership and create new business to fend off increased competition from the likes of Amazon.com Inc.
Rakuten's travel site is already one of the largest in Japan. Two decades ago, travel company H.I.S pioneered the trend, setting up Skymark Airlines, which is now Japan's leading discount carrier.
Mikitani said he saw great potential in the budget travel market in Japan. "In America, discount carriers account for 30 percent of travel. In Southeast Asia, it's 50 percent. In Japan, it's only 3 percent," he told the same news conference.
Rakuten will own an 18 percent stake in the new airline, while Noevir Holdings Co Ltd, a diversified conglomerate that owns an aircraft leasing business, will own 9 percent. Octave Japan Infrastructure Fund will own 19 percent and sports firm Alpen Co Ltd will own 5 percent.
AirAsia's return would intensify competition among Japan's discount carriers, which have struggled to wrest travellers away in a domestic market dominated by from ANA and Japan Airlines .
"This is AirAsia part two and I hope there is no part three," Tony Fernandes, the owner and CEO of AirAsia, told reporters in Tokyo.
Of the nine low cost carriers flying within Japan, six including Peach Aviation, Jetstar Japan and Air Do are controlled or affiliated to the nation's big two carriers.
A lack of landing rights at major hubs in Tokyo and other big cities mean discount airlines struggle to win access to the most lucrative destinations, and when they do, they are vulnerable to price competition from the big carriers that are better able to absorb losses on a few routes.
The new airline will also be challenged by a severe shortage of pilots in Japan. Officials from the tourism and industry ministries proposed last week raising the retirement age of pilots for low-cost carriers from 64 years as over a third of the current pilots are already 60 or older, according to a ministerial report.
AirAsia is Southeast Asia's biggest budget airline by passenger numbers. It is keen to expand beyond the region in the face of stiff competition from rival low-cost carriers and last month, its Indian joint venture, AirAsia India, started flights. ($1 = 101.4200 Japanese yen) (Additional reporting by Anshuman Daga in SINGAPORE; Writing by Tim Kelly; Editing by Miral Fahmy)