By Tim Kelly
TOKYO, Nov 5 (Reuters) - Japan is considering providinglow-interest loans from a state-run bank to support exports ofaircraft designed for military use, the first time such salesare being considered since the end of World War Two, accordingto officials with knowledge of the still-developing policy.
The step would mark an extension of Prime Minister ShinzoAbe's efforts to bolster the self-reliance of Japan's militaryand could open an overseas market worth tens of billions ofdollars in coming years for the country's defence contractors.
It would also mark a sharp reversal of the near-total ban onexports of military equipment, a development that could strainties with China as a more assertive Japan seeks a market formilitary technology in Asia and beyond.
Japan's post-war constitution, written by the U.S.-ledoccupation forces, renounced war and a standing army. Majormilitary equipment makers moved into other fields and thecurrent ban did not formally take effect until the fast-growthera of the 1960s and the evolution of Japan's Self DefenseForces put the issue on the agenda.
Two of the initial test cases for Japan's policy shift arelikely to be the C-2 military transporter, built by KawasakiHeavy Industries and ShinMaywa Industries' US-2 amphibious plane, according to three officials involved.
Both companies are looking to export civilian versions ofthe aircraft, which would allow them to avoid the ban. Bothcompanies have also made inquiries about the Abe government'swillingness to provide financing to help close sales againstestablished aircraft makers.
In one partial precedent, Japan has extended overseasdevelopment assistance (ODA) to the Philippines and Indonesia tohelp those governments buy Japanese-built ships for coastalpatrols.
But the rules of Japan's $17-billion annual ODA programmeforbid military support. Japan's government approved the aidafter winning assurances that the boats would be used only tocounter piracy and terrorism and after winning an endorsementfrom the United States, Japan's main ally.
A more likely option for aircraft exports, according to the three officials involved in the discussions, would below-interest loans from the Japan Bank for InternationalCooperation (JBIC), a state-operated lender headed by formerToyota Motor Corp chief Hiroshi Okuda, to the buyers.
The bank is funded largely by borrowing from the nation'sForeign Exchange Fund Special Account, the pool of moneyavailable for intervention in currency markets.
A spokesman for JBIC said the bank does not discuss any loanapplications as a matter of policy.
Masanobu Oogaki, a project manager at Kawasaki's aerospacedivision helping oversee the C-2 project, said officials led bythe Ministry of Economy Trade and Industry had discussed seekingJBIC loans for the military transporter once the company had apotential overseas buyer.
JBIC typically charges interest of just over 1 percent on aloan of less than five years. The bank has recently beenrecruited to help Japanese companies win contracts for biginfrastructure projects. Most of its lending is linked tosecuring overseas oil and gas reserves for Japan.
INDIA WEIGHS HISTORIC PURCHASE
ShinMaywa's US-2, used for search and rescue, may be thefirst Japanese military-designed plane to win an overseas order.Negotiations with India's military for what would be the firstsale are already underway, both sides say.
The plane, which could be outfitted for firefighting or as akind of amphibious hospital, costs an estimated $110 million perunit.
An official at India's Defence Ministry who asked not to benamed confirmed that India has shown an interest in buying theUS-2 but said no decision had been made.
"Our policymakers are yet to take a decision as they arestill assessing how far it would be relevant to Indianconditions," the official said.
ShinMaywa, which sees Canada's Bombardier Inc. asits main competitor, estimates that there could be a globalmarket of about 100 amphibious planes for which it couldcompete.
Kawasaki's Oogaki, said his company believes it can competefor as many as 300 orders over the next decade or so withpotential customers in Asia, the Middle East and Africa.
The chief competitor to Kawasaki's twin turbofan C-2 is theA400M military transport built by Europe's Airbus.Similar in size and capability, the Airbus cargo plane hasracked up 170 orders in Europe at a price tag starting at around$160 million.
So far, Japan's defense ministry has ordered three C-2s atjust over $200 million each in the most recent budget.
By opening export markets for military equipment makers, theper unit cost of such equipment could fall because of the volumeof production, making it cheaper for Japan's own military aswell, a security panel that drafted recommendations for Abe saidlast month.
The C-2 represents a major upgrade in the ability of Japan'smilitary to shift equipment and troops to far-flung locations.
Compared to its predecessor, the C-1, which is currently inservice, the new plane can lift nearly four times as much cargo- enough to carry a mid-size helicopter, as depicted in salesbrochures drawn up by Kawasaki.
While the C-1 struggles to reach Japan's outlying islands,the C-2 could carry a load from Tokyo to Kabul, for example.
Abe plans to release a review of Japan's military policy bythe end of the year that is expected to include a commitment toopen up military exports and arms development programs.
Mitsubishi Heavy is currently in talks over joining theLockheed Martin Corp led F-35 fighter jet programme as asupplier after Japan placed an order for the aircraft.
In the meantime, Kawasaki, a major wartime maker of fightersand bombers that has became better known for its motorcycles inrecent decades, plans to have the C-2 ready for service withJapan's military by 2015.
The company has a team of around 10 people marketing theC-2, which will be sold as the YCX overseas, Oogaki said.
Investors have anticipated a boon to heavy equipment makersfrom a pivot in security policy under Abe and the sector hasoutperformed in a rising market. Shares of Kawasaki are up 122percent over the past year, while ShinMaywa is up 78 percent.Mitsubishi Heavy has gained 90 percent. Over the same period,the benchmark Topix index has gained 58 percent.
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