By Tim Kelly
TOKYO (Reuters) - Mitsubishi Heavy Industries Ltd's <7011.T> broader participation in the F-35 stealth fighter program could be delayed by an intra-governmental spat over subsidies, two people familiar with the process said.
The dispute could force Japan's biggest arms maker to renegotiate a deal of undisclosed size with Britain's BAE Systems PLC (BAES.L) to supply F-35 rear fuselage parts under an international consortium, the people told Reuters.
"Mitsubishi will likely have to backtrack on its earlier agreement, but if BAE can wait something could be worked out," one of the people said.
The spat exposes a rift between arms industry bureaucrats seeking subsidies to back Japan's part in the F-35 program, and finance ministry officials intent on reining in spending to curb Japan's massive budget deficit.
A Mitsubishi Heavy spokesman declined to comment. A spokesman at BAE was not available to respond to an emailed request for comment.
Cabinet Secretary Yoshihide Suga declined to comment on the matter at a regular press briefing.
"Participation in the F-35 program will help improve skills in Japan and help underpin our defence industry," Suga said.
Prime Minister Shinzo Abe in April eased four-decade-old restrictions that had sharply limited the ability of Mitsubishi Heavy and other defence contractors from selling their wares overseas.
Abe hopes to spur international collaboration and tap overseas markets in a bid to widen Japan's arms production base and lower procurement costs at home, to help build a more robust military to counter China's growing strength.
Japan's participation in the $400 billion (237 billion pounds) F-35 project has been touted as a sign of the nation's willingness to end decades of isolation.
Japan so far plans to buy 42 F-35s, dubbed the Joint Strike Fighter, for its own military, with analysts expecting it to acquire as many as 100 more to replace older Boeing Co (BA.N) F-15 fighters used by its air force. That, however, is a fraction of what is projected to be a global fleet of F-35s numbering in the thousands.
Mitsubishi Heavy, maker of the wartime Zero fighter, has been tasked with assembling the 42 F-35s that Japan has bought in a plant built with taxpayer money.
So far the government has budgeted 63.9 billion yen (370 million pounds) for the plant, along with 18.2 billion for IHI Corp <7013.T> to build the engine parts and 5.6 billion yen for the radar components.
But in exporting parts, Mitsubishi Heavy is concerned a lack of experience in competitive global markets means it will struggle to make money, prompting some government officials to back subsidies, the people said.
BAE, Lockheed Martin Corp (LMT.N) and other partners in the nine-nation consortium welcome Japan's F-35 participation, but not if it means relenting on tight production costs, other people with knowledge of program told Reuters in January.
Discussions for Mitsubishi Heavy funding have been ongoing for some time and so the holdup is unrelated to the recent grounding of F-35s, prompted by an engine on one of the jets in Florida breaking apart and catching fire during takeoff.
(Editing by William Mallard and Christopher Cushing)