"Japan will urge China to make further efforts to increase transparency," said the report submitted to the cabinet by Foreign Minister Taro Aso.

The report voiced concern that China's military expenditure "has been boosted more than 10 percent (annually) for 18 consecutive years."

It was the first time that the annual report explicitly called on Beijing to improve military transparency, although senior Japanese officials have repeatedly made similar comments.

But the report also for the first time welcomed economic growth in China, which is Japan's largest commercial partner.

"The government welcomes China's economic rise with the basic understanding that its development is a 'good opportunity,'" the report said.

"Japan's forward-looking basic policy to develop the Japan-China relationship will not change."

Commercial ties between the Asian neighbors have steadily grown even as political relations remain tense.

The relationship has deteriorated over the past year as China, the only Asian nation with veto power on the UN Security Council, blocked Japan's bid for a permanent seat, arguing that Tokyo had not atoned for its aggression in the 20th century.

But the report said Japan would keep trying to win a permanent council seat alongside three other nations whose joint bid flopped last year.

"Japan will continue making efforts to actualize reform of the Security Council while continuing to cooperate with Germany, India and Brazil and continuing negotiating with other countries," the report said.

China has been infuriated by Japanese Prime Minister Junichiro Koizumi's pilgrimage to Yasukuni Shrine, which honors 14 top war criminals among 2.5 million war dead.

Beijing has refused to hold high-level government talks with Tokyo since October, when Koizumi made his fifth visit to the Shinto shrine since taking office in 2001.

Separately, the report said that Japan saw some progress last year with North Korea despite the stalemate in six-nation talks on ending Pyongyang's nuclear drive.

The annual report cited the resumption of bilateral talks between Japan and North Korea in November as a step forward.

Tokyo is concerned about the military development of North Korea, which fired a missile over Japan in 1998, but another sticking point with Pyongyang is a row over Japanese nationals abducted by the regime's spies.

"The government will continue taking the basic position of using 'talks and pressure,' implementing comprehensive measures and patiently dealing with (the North) to solving concerns," the report said.

Japan refuses to establish diplomatic relations with the North as it believes at least eight kidnapped Japanese are alive and being kept under wraps by the dictatorship.

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