NUSA DUA, Indonesia (Reuters) - Tokyo sees growing investment opportunities in Myanmar as the reclusive state embarks on political and economic reforms, citing its strategic location between India, China and Southeast Asia, a senior Japanese official said on Wednesday.
But any investments must be gradual with Japan not ready to resume full-fledged trade and aid, said Kimihiro Ishikane, deputy director-general of Japan's Foreign Ministry's Asian and Oceanian Affairs Bureau.
"We are cautiously observing and following the positive developments which are now taking place in Myanmar," he told reporters on the Indonesian resort island of Bali during a regional summit. "(We) are definitely ready to support the current path the Myanmar government is taking in many ways."
Myanmar, one of Asia's most isolated and oppressive nations, has embarked on what many diplomats see as its most significant reforms in decades, raising the prospect of an eventual lifting of sanctions in the former British colony also known as Burma.
The 10-member Association of South East Asian Nations (ASEAN) is expected this weekend to approve Myanmar's bid to take the regional bloc's rotating presidency in 2014, giving the new government some long-sought recognition despite reservations from Washington that more reforms are needed.
Recent overtures by its government have included calls for peace with ethnic minority groups, tolerance of criticism, an easing of media controls, the suspension of Chinese-funded dam project and the legalisation of labour unions.
Since the army nominally handed power to a civilian parliament in March after the first elections in two decades, President Thein Sein has also defied sceptics by reaching out to Nobel Peace Prize-winner Aung San Suu Kyi.
Japanese aid guidelines to Myanmar were relaxed after Suu Kyi was freed from 15 years of house arrest last year, Ishikane added, clearing the way for Japanese involvement in some small infrastructure projects.
"We'd like to do something but we should go gradually," Ishikane said. "We are not at the stage to resume full-fledged cooperation with Myanmar."
While some multinational companies have expressed interest in its natural gas reserves and China has poured billions of dollars into developing energy resources, Ishikane said Myanmar's strategic location also made it attractive.
The country, as big as France and Britain combined, sits between booming India and China with ports on the Indian Ocean and Andaman Sea that, if developed with proposed rail and pipeline projects, would allow cargo ships to bypass the Straits of Malacca.
That would open the way for faster delivery of cargo from the Middle East and Africa to China and other countries in the region straddling the Mekong River such as Thailand.
"This will connect ASEAN and especially the Mekong with India," said Ishikane. "This will give an outlet for avoiding the Malacca Strait ... it is a very important part of connectivity which is currently lacking or missing."
China, for instance, now ships 80 percent of its imported oil through the Straits of Malacca, a congested sea lane shared by Singapore and Malaysia just a few nautical km (miles) wide in places.
Security analysts have long feared a trade-crippling attack there.
Land access to the Indian Ocean through Myanmar would allow Beijing to diversify oil-shipment sources with a quicker route to its western provinces.
Backed by Chinese money, Myanmar is building a new, multi-billion-dollar port through which oil can reach a 790-km (490-mile) pipeline now under construction - with Chinese investments and workers - that will be cut across Myanmar and link refineries in western China.
Another parallel pipeline will pump Myanmar's offshore natural gas to China.
But the recent suspension of the $3.6 billion Myitsone dam being built and financed by Chinese companies in northern Myanmar has caused tension in the relationship.
Chinese pledged investment in Myanmar reached above $14 billion in the 2010/11 (April-March) fiscal year, causing total foreign direct investment promises to soar to $20 billion from just $300 million a year before, official data showed.
Writing by Jason Szep and Ed Lane