In shifting its security policy, Japan has also eased the nation's ban on arms exports -- which allowed its bidding to build submarines for Australia's Royal Navy. But Australia's Prime Minister has announced Canberra wants to work with France instead.

12 regionally superior submarines, will be built here at Osborne in South Australia. They will be designed in partnership with DCNS, the French naval ship building company.

"I want to thank TKMS and the government of Japan for their proposals, which were of a very high quality. However, the French offer represented the capabilities best able to meet Australia's unique needs," said Australian Prime Minister Malcolm Turnbull.

The submarine deal is expected to be worth more than US$500 billion. Analysts cast Japan as a frontrunner to win the bid. But Japan's inexperience in global defense deals and an initial reluctance to build in Australia kept it from securing the deal.

Australia's decision is a blow for Japanese Prime Minister Shinzo Abe, who promised his new security agenda would increase Japanese exports. Tokyo established a specialized agency to facilitate the overseas sale and acquisition of weapons last year.