By Takaya Yamaguchi and Tetsushi Kajimoto
TOKYO (Reuters) - Japan will hold off on setting a ceiling for next fiscal year's defence spending, a draft of the government's budget outline reviewed by Reuters showed, underscoring resolve to beef up expenditure to counter China's growing military presence.
Under the budget outline, the government will also set aside about 4.5 trillion yen ($33.24 billion) for Prime Minister Fumio Kishida's flagship policy aimed at boosting investment in areas like green innovation and digitalisation, the draft showed.
The budget outline, which serves as a guideline for ministries in submitting spending requests for next fiscal year, will be approved by cabinet on Friday.
The removal of the defence cap, which has become customary in recent years, comes as Russia's invasion of Ukraine and China's growing military presence in Asia have raised public awareness of geo-political risks.
The government said last month in an annual economic policy document that it wanted to drastically increase defence spending "within the next five years", mentioning a specific time frame for the expenditure for the first time.
Kishida's ruling Liberal Democratic Party has also proposed boosting defence spending to 2% of gross domestic product (GDP) within five years, from about 1%.
In the past, the government set strict ceilings for each spending item in state budgets to rein in huge public debt. That has changed in recent years as the government seeks to protect the economy from shocks such as the COVID-19 pandemic.
As a result, the annual budget has continued to expand and may exceed this year's 107.6 trillion yen in fiscal 2023 to hit a record for 11 years in a row, some analysts say.
In the fiscal 2022 budget, defence budget stood at 5.4 trillion yen, making up just 5% of initial outlay. Social welfare spending, by contrast, accounted for a third of total outlays due to a rapidly ageing population.
Based on the budget outline approved on Friday, government ministries and agencies will submit budget requests to the finance ministry by the end of August. The finance ministry will compile the government's draft budget in late December, which requires parliament approval to take effect.
($1 = 135.3700 yen)
(Reporting by Takaya Yamaguchi and Tetsushi Kajimoto, Writing by Leika Kihara; Editing by Robert Birsel)