A private advisory panel to Prime Minister Junichiro Koizumi plans to mention, in a report to be completed by the end of September, the threat stemming from China's military build-up and fears of a cross-strait military clash with Taiwan, the Nihon Keizai newspaper said.

Wary of raising the hackles of its powerful neighbour, up to now Japan has not so far explicitly referred to nuclear-armed China as a military threat in any published official document.

But China's lavishly-funded military build-up has been seen as one of the reasons for a reduction in Tokyo's official development aid to Beijing in recent years.

The report from the advisory panel is expected to be reflected in a new long-term defence plan to be completed by the government by the end of this year, the leading business daily said.

The unprecedentedly frank description risks heightening further the diplomatic tension between Beijing and Tokyo.

Japan's ties with China have been soured by Koizumi's repeated pilgrimages to a Shinto shrine honouring the war dead, including World War II leaders, and a territorial dispute over a string of resource-rich islets in the East China Sea.

Beijing's plan to develop natural gas near the demarcation line of Japan's exclusive economic zone in the East China Sea has also added to the bilateral strain.

The current defence plan avoids mentioning China as a military threat although it refers to "large-scale military powers," including those with nuclear capability, in the region surrounding Japan.

"Many countries are inclined to expand and modernise military capabilities on the strength of economic development and other factors," it says, citing the Russian far east and the Korean peninsula by name.

Many members of the advisory panel have called China's military budget and defence policies "unclear", the daily said.

They warned Japan should cope with "each and every instance" of China's military expansion, the report added.

The panel's report is expected to highlight increases in China's military spending and natural gas development which point to the country's expansionist policy, the daily said.

Japan's generous official loans to China have been under fire from some members of Koizumi's long-ruling conservative Liberal Democratic Party in view of Beijing's huge spending on its military buildup, manned spacecraft program and its own aid to neighboring countries.

Japan's subtle shift from its cautious approach to China reflects the chill in their bilateral relations on one hand and the strengthening of Tokyo's alliance with Washington on the other, the daily said.

The panel's report is expected to underline the maintenance of a "deterrence based on the Japan-US alliance," the daily said.