Sept. 20 (Bloomberg) -- Shinzo Abe, Japan's prime minister in waiting, said China's military spending is a ``concern,'' and improving diplomatic relations between the two countries will require as much effort from Beijing as Tokyo.

``We don't currently see China as a threat,'' Abe said in a Sept. 18 interview in Tokyo. ``However, military spending has been in double digits for the last 18 years and the lack of transparency on military strength and spending is a concern. We hope China develops peacefully.''

Abe, who turns 52 tomorrow, was elected head of the ruling Liberal Democratic Party today, paving the way for him to succeed Junichiro Koizumi as prime minister. He will become the youngest leader of Japan in more than 60 years when the legislature votes on Sept. 26.

China has refused to hold a summit with Japan because of Koizumi's visits to Tokyo's Yasukuni shrine, arguing the war memorial glorifies Japanese militarism. China on March 4 announced a 14.7 percent increase in its defense budget to 283.8 billion yuan ($35.7 billion). The U.S. maintains that China spends two to three times more than it discloses.

Abe, who wouldn't say whether he will visit Yasukuni, said overall relations with China are improving.

``During the Koizumi administration, trade has doubled and Japan's investment in China rose by 20 percent in 2005 from 2004,'' he said. ``If relations were bad, this wouldn't have happened. China benefits from the current economic relations and doesn't want to destroy it. It's the same with Japan.''

Avoiding China

Abe said it was unlikely he will go to China for a summit before leaders of the Asia-Pacific Economic Cooperation forum meet in Vietnam in November.

``I don't think it would be easy to do that,'' he said. ``Both sides need to make efforts for summits to resume.''

Abe said he is ``committed'' to doubling foreign investment in the country in four years through changes in the law and will offer subsidies to local regions that attract overseas capital.

Foreign direct investment in Japan surged 90 percent to 4.03 trillion yen ($34.2 billion) in the twelve months ended March 31, 2005.

``Regulations that are blocking investment into Japan should be removed,'' he said. ``We will increase aid in the form of grants to regions that are making efforts to attract foreign investment.''

He said he plans to submit a bill to that effect in the next parliamentary session.

Cutting Spending

Abe has been part of the administration since Koizumi took office in April 2001, when Japan was in its third recession in a decade, and faced a dysfunctional banking system and large fiscal deficits.

Koizumi cut infrastructure spending in his first year by 11 percent and then forced banks to write off 19 trillion yen ($171 billion) of bad loans. Last year, he pushed through a bill to privatize the nation's postal system, which would take 260,000 employees off the government's payroll.

Abe said he wants to speed up Koizumi's deregulation policies by cutting spending and encouraging more investment in the world's second-biggest economy.

``We will certainly accelerate reforms,'' he said.

Koizumi's government last month set goals for revenue and spending cuts so it can find the 16.5 trillion yen it needs to balance the budget by 2011 and halt the increase in Japan's public debt. The spending cuts would account for 14.3 trillion of the total, with the rest coming mostly from higher taxes.

Japan's public debt is forecast to rise to 151 percent of gross domestic product by March, the largest in the world.

The government has said it wants to balance spending and revenue by achieving a so-called primary balance, where tax revenue is equal to or exceeds government spending, excluding interest payments.

Fiscal Discipline

``We will maintain strict fiscal discipline,'' Abe said. ``We will take steady steps to bring the primary balance into the black.''

Government bond sales in the fiscal year beginning April 1, 2007, will be lower than this year's 30-trillion-yen target, he said.

The grandson of the late Prime Minister Nobusuke Kishi and son of former Foreign Minister Shintaro Abe, Shinzo Abe was first elected to parliament in 1993. He was appointed chief cabinet secretary, the government's top spokesman, on Oct. 31 last year.

In succeeding Koizumi he will follow the third-longest- serving prime minister since World War II.

``I've been through five elections and survived power struggles within the LDP,'' Abe said. ``Winning the LDP presidency will give me another boost in confidence.''

Abe said he hoped to achieve a revising of Japan's pacifist constitution, written by the U.S. after World War II, which would remove a ban on military forces and end debate over whether the nation's self-defense troops are constitutional.

Changing Constitution

The LDP last year approved a draft changing the wording of Article 9 of the constitution that says Japan renounces war ``as a sovereign right.'' Japanese courts have ruled that the country can keep forces for self-defense purposes. More than 40,000 U.S. troops are stationed in Japan.

North Korea's missile tests in July raised a debate over whether Japan should consider pre-emptive strikes, which isn't allowed under current laws.

``National defense is a national right,'' Abe said. ``If U.S. F-16 fighters take off to intercept 10 missiles headed to Japan and attacking their base, and ask for help from Japanese F-15s, could we say, `no?' The moment we said, `we cannot go,' it would be the end of the U.S.-Japan alliance.''

To contact the reporter on this story: John Brinsley at jbrinsley@bloomberg.net; Keiichi Yamamura at kyamamura@bloomberg.net

Last Updated: September 20, 2006 02:22 EDT