Japan clinched a landmark A$10 billion ($6.5 billion) deal on Tuesday to build warships for Australia, marking Tokyo's most consequential defence sale since ending a military export ban in 2014 as it steps away from postwar pacifism to counter China.

Under the agreement, Mitsubishi Heavy Industries 7011.T will supply the Royal Australian Navy with three, upgraded Mogami-class multi-role frigates built in Japan from 2029. Eight more frigates will be built in Australia.

Designed to hunt submarines, strike surface ships and provide air defence, the highly automated warships can be operated by just 90 sailors, half the crew of Australia's aging Anzac-class frigates.

Australia plans to deploy the ships to defend critical maritime trade routes and its northern approaches in the Indian and Pacific Oceans, where China's military footprint is expanding.

"It's going to be really important in terms of giving our navy the capability to project, and impactful projection is at the heart of the strategic challenge," Australian Deputy Prime Minister Richard Marles said at a briefing.

The Mogami, emblematic of a global shift toward versatile modular warships, offers more firepower and a 4,000 nautical miles more range than the current fleet.

"It takes our general purpose frigates from being able to fire 32 air defence missiles to 128," including "the most advanced", defence industry minister Pat Conroy said at the briefing with Marles.

The deal also anchors Japan's push to forge security ties beyond its alliance with the U.S. to counter China.

The defence industry partnership "makes it harder for China to play Japan and Australia off against each other and sends a concerted signal to Beijing that both countries are willing to make their quasi-alliance a functioning reality” said Euan Graham, a senior analyst for defence strategy at the Australian Strategic Policy Institute.

The successful frigate bid eases the sting of 2016, when Australia rejected a Japanese submarine program, also led by MHI, in favour of a French design. Canberra scrapped that project in 2023, opting instead to build nuclear-powered submarines with the United States and Britain under the AUKUS pact.

"We took that lesson to heart. The Australian government recognized not only the technical strengths of our ships but also the unified commitment of both government and industry," Japan's Minister of Defence Gen Nakatani said at a briefing in Tokyo.

INITIAL CONTRACT

The initial order for three Japanese-built frigates will be Australia’s largest naval purchase since the AUKUS agreement, while the remaining eight ships are expected to be constructed by Austal in Western Australia.

"We are currently focusing on establishing maintenance operations in Australia for the ships built here and are beginning communication with local companies," Hiroshi Nishio MHI’s chief financial officer, said after the company released its latest quarterly earnings.

However, with Japan's biggest defence contractor untested in managing overseas military projects, MHI will tap other business units to support the work, Nishio added.

Officials from both countriessaid pricing, sustainment, and the transfer of production to Australia remain key issues to settle before a finalized contract can be signed early next year.

MHI's Mogami frigate was selected over German company Thyssen­Krupp Marine Systems' MEKO A-200 in a meeting of the Australian government's national security committee.

Shares in MHI jumped 5.7% in Tokyo. Austal closed up 7.94%, buoyed by assurances from Canberra of a pipeline of shipbuilding work, including the Mogami program.

($1 = 1.5456 Australian dollars)

(Reuters)