By Tim Kelly and Nobuhiro Kubo
TOKYO, Feb 28 (Reuters) - Mitsubishi Heavy Industries has lost a potential deal to supply tank engines to Turkey because of restrictions that remain in place on Japan's military exports, officials in Turkey and Japan said.
The development shows the limits of Japan Prime Minister Shinzo Abe's effort to dismantle a near total ban on Japanese weapons exports that has shut the country's defence contractors out of overseas markets since World War Two.
Abe is pushing to ease the terms of Japan's self-imposed weapons export restrictions in part to lower Japan's defence procurement costs as part of a bid to build a more robust military to counter the rising regional power of China.
Mitsubishi Heavy had been under consideration to supply engines for the Altay tank being developed by Turkey's Otokar since last year.
But on Thursday Murad Bayar, Turkey's undersecretary for state-run defence industries, told reporters that the potential deal had been quietly dropped in talks with Tokyo.
"We have agreed with Japanese authorities to leave this topic off the agenda and focus on other areas of co-operation," Bayar said.
Turkish Prime Minister Tayyip Erdogan had raised the issue of Japan's co-operation in supplying tank engines when Abe visited Ankara in May. The approach by Erdogan sparked a round of talks between officials from the two countries and a visit to Turkey by Japanese engineers, officials in Japan said.
A spokesman for Mitsubishi Heavy said the company had no comment because the discussions were a "government matter."
Yoshihide Suga, Japan's Chief Cabinet Secretary, said on Friday that he was not aware of the status of the talks with Turkey but said any agreements would be based on the policies that limit Japan's military.
Japan, which renounced the right to wage war in its postwar constitution, effectively banned arms exports in 1967.
Under new guidelines being developed by Abe's coalition government, exports would be approved by the trade ministry if they were judged to serve peaceful missions or if joint development of a weapon was deemed to enhance national security, a person with knowledge of the review has told Reuters.
But the more lax arms exports standards under consideration by the Abe administration would still carry a requirement that Japan be consulted before weapons using Japanese technology were exported to other countries.
Talks with Turkey on the Altay tank broke down on that point at the working level, officials in Japan told Reuters. Turkey has hoped to export the Altay to other countries.
In a deal announced last month, India became the first country to agree to buy military aircraft from Japan since the war. Under the preliminary deal worth an estimated $1.65 billion, ShinMaywa Industries would supply amphibious aircraft to India's military. (Writing by Kevin Krolicki; Editing by Neil Fullick)