Nov. 23 (Bloomberg) -- Mitsubishi Heavy Industries Ltd., Japan's largest defense contractor, will start making Patriot Advanced Capability 3 missiles under license from Lockheed Martin Corp. as early as next year, Nikkei English News said.

The agreement comes after Japan asked the U.S. to let a Japanese company build the missile to help the defense industry maintain its manufacturing technology, Nikkei said, without citing anyone. Japan is expected to adopt a new defense policy that will invest more in missile-defense systems and anti-terrorism efforts, and less on tanks and ships, the report said.

Lockheed will start transferring technology on the surface-to- air missiles to Mitsubishi Heavy after the governments sign a licensing agreement as early as the start of 2005, Nikkei said.

Japan will use part of the 106.8 billion yen ($1 billion) for missile-defense systems in the fiscal 2004 budget to buy Patriot 3s from Lockheed this fiscal year, the report said. Mitsubishi Heavy, which will supply the missiles after that, expects to earn more than 100 billion yen from the contracts, Nikkei said.

(Nikkei 11-23)

To contact the reporter on this story: Jag Dhaliwall in Tokyo jdhaliwall@bloomberg.net.

Last Updated: November 22, 2004 22:34 EST