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This clears the way for Japan to sell weapons to more than a dozen countries.
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The announcement on Tuesday marks a milestone in Tokyo's shift away from the pacifism that has characterised its post-war defence policy. It also comes at a time of heightened tensions in the region.
Restrictions that limit arms exports to just five categories - rescue, transport, warning, surveillance and minesweeping - will be lifted.
This means Japan can now sell lethal weapons to the 17 countries with which it has defence agreements, including the US and the UK.
A ban on arms sales to countries involved in conflict will stay. But authorities say they will allow for exceptions "in special circumstances".
"In an increasingly severe security environment, no single country can now protect its own peace and security alone," Japanese Prime Minister Sanae Takaichi wrote on X on Tuesday.
However, she also said there was "absolutely no change in our commitment to upholding the path and fundamental principles we have followed as a peace-loving nation for over 80 years since the war".
"Under the new system, we will strategically promote equipment transfers while making even more rigorous and cautious judgments on whether transfers are permissible," she wrote.
Chief Cabinet Secretary Minoru Kihara said in a press briefing that the move was "intended to safeguard Japan's security and further contribute to the peace and stability of the region".
China has said it is "seriously concerned" about what it described as Japan's "reckless militarisation".
"China will remain highly vigilant and resolutely opposed [to the move]," Beijing's foreign ministry said in a routine media briefing on Tuesday.
The new arms export rules were announced as Japan's Self-Defence Forces took part in annual war games between the US and the Philippines. Japan is
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