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* Japan PM Abe reverses decade of military-spending declines
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* China urges Japan to face up to past aggression (Adds comment from defence minister, Chinese news agency)
By Linda Sieg and Kiyoshi Takenaka
TOKYO, Dec 17 Japan will boost its military spending in coming years, buying early-warning planes, beach-assault vehicles and troop-carrying aircraft, while seeking closer ties with Asian partners to counter a more militarily assertive China.
The planned 2.6 percent increase over five years, announced on Tuesday, reverses a decade of decline and marks the clearest sign since Prime Minister Shinzo Abe took office a year ago that he wants a bigger military role for Japan as tension flares with China over islands they both claim.
Abe's top priority has been reviving a long-sluggish economy, but he has also pledged to strengthen Japan's military and boost its security profile to meet what he says is a threat from China's rapid military buildup and recent actions to back its claims to Japanese-held islands in the East China Sea.
"China is attempting to change the status quo by force in the skies and seas of the East China Sea and South China Sea and other areas, based on its own assertions, which are incompatible with the established international order," Japan said in its first national security strategy, one of three plans approved on Tuesday.
"China's stance toward other countries and military moves, coupled with a lack of transparency regarding its military and national security policies, represent a concern to Japan and the wider international community and require close watch."
Abe's government also vows to review Japan's ban on weapons exports, a move that could reinvigorate struggling defence contractors like Mitsubishi Heavy Industries Ltd and Kawasaki Heavy Industries Ltd.
The policies, including a five-year military buildup and a 10-year defence guideline, call for stronger air and maritime surveillance capabilities and improved ability to defend far-flung islands through such steps as setting up a marine unit, buying unarmed surveillance drones and putting a unit of E-2C early-warning aircraft on Okinawa island in the south.
Japan will budget 23.97 trillion yen ($232.4 billion) over the coming five years for defence, up from 23.37 trillion yen from the previous five years.
Under current procurement practices, the five-year spending would have been 24.67 trillion yen, but the government expects to save 700 billion yen from streamlining procedures to cut costs, officials said.
Military spending had fallen for 10 years until Abe boosted the defence budget 0.8 percent this year. The Defense Ministry is seeking a 3 percent rise in the year from next April, the biggest increase in 22 years, although much of the growth reflects higher import costs due to a weaker yen.
In the two decades through last year, Japan was the sixth-biggest military spender, just behind Britain, with outlays rising 13 percent in constant 2011 dollar terms, according to the Stockholm International Peace Research Institute. By contrast, China's defence spending exploded more than five-fold, vaulting the country to second place from seventh.
Defence Minister Itsunori Onodera denied that the plan was aimed at any country and said better China ties were vital.
"This is a country with which we aim to have a strategic, mutually beneficial relationship. It is also a country we have deep ties economically, historically and culturally. It is important for ties with this important country to improve further," he told a news conference.
China and Japan have been embroiled in an increasingly strident row over tiny islands, which Japan calls the Senkaku and China calls the Diaoyu. Tension spiked late last month when Beijing announced an air-defence zone over a wide area including the islands, prompting protests from Tokyo, Washington and Seoul and raising fears that a minor incident in the disputed sea could quickly escalate.
Sino-Japanese ties have been overshadowed for years by what China says has been Japan's refusal to admit to atrocities committed by Japanese soldiers in China between 1931 and 1945.
China's Xinhua news agency said they were clearly aimed at China and it warned Japan against "big-power geopolitics".
"If Japan really hopes to return itself to the ranks of a 'normal country', it should face up to its aggression in history and cooperate with its Asian neighbours instead of angering them with rounds and rounds of unwise words and policies," state-run Xinhua said.
Past Japanese governments have stretched the limits of a postwar Constitution that renounces war and says Japan will never have an army or navy. Abe wants to go further, including lifting a ban on fighting overseas or aiding an ally under attack. [ID: L3N0JU010]
CASH TO FOLLOW?
Hostilities between the world's second- and third-biggest economies would likely drag in the largest, the United States, which is treaty-bound to defend Japan in the event of war.
U.S. contractors would be major beneficiaries of Abe's increased spending. These include V22 Osprey maker Boeing Co , lead F-35 fighter-jet contractor Lockheed Martin Corp , missile-fabricator Raytheon Corp, and Northrop Grumman Corp, which builds the Global Hawk unarmed drone.
Another corporate winner could be Britain's BAE Systems PLC , which through its American subsidiary, U.S. Combat Systems, is a major supplier of "amtrack" assault amphibious vehicles to the U.S. Marines.
The thrust of the defence update is in line with a review three years ago by the party Abe ousted last December. His spending increases suggest Abe is more willing to back his policies with cash, although Japan's big public debt - more than twice the size of its economy - still acts as a brake.
"In 2010 we said more or less the same thing, but the money didn't follow," said Narushige Michishita, a security expert at the National Graduate Institute for Policy Studies. "Whether it will result in better capability is yet to be seen, but the willingness to do more on defence is definitely there."
Still, given China's annual double-digit increases in defence spending, Japan will have to rely heavily on cooperation with the United States and others in the region to maintain the status quo.
"Without partners, there is no way we can check China and prevent it from becoming more assertive," Michishita said
Indeed, Abe's national security strategy calls for Japan not only to upgrade its cooperation with the United States but strengthen ties with South Korea, Australia, Southeast Asian countries and India.
Abe and Southeast Asian leaders called at a Tokyo summit on the weekend for freedom of the air and sea, a veiled reference to China which has territorial rows with several members of the Association of South East Asian Nations.
Japan's long-range plans also mark a shift from its Cold War posture of defending against a Russian attack from the north, toward a potential conflict with China to the west and south. The defence plan cuts Japan's tanks by 400 to 300 over 10 years, while adding some faster, more manoeuvrable combat vehicles that could be flown in, say, to retake islands.
The new policy outline also calls for Japan to beef up its ability to defend against ballistic missile attacks, such as from unpredictable neighbour North Korea.
But it stops short of referring to the acquisition of the capability to strike enemy bases overseas, a costly and controversial step that would further distance Japan from the "purely defensive" defence posture to which it adopted after its defeat in World War Two. ($1 = 103.1400 Japanese yen) (Additional reporting by Nobuhiro Kubo and Tim Kelly in Tokyo and Ben Blanchard in Beijing; Writing by Linda Sieg and William Mallard; Editing by Robert Birsel)
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