By Linda Sieg

TOKYO (Reuters) - Japan is poised for a historic shift in its defense policy by ending a ban that has kept the military from fighting abroad since World War Two, a major step away from post-war pacifism and a big political victory for Prime Minister Shinzo Abe.

The change will significantly widen Japan's military options by ending the ban on exercising "collective self-defense", or aiding a friendly country under attack. It will also relax limits on activities in U.N.-led peace-keeping operations and "grey zone" incidents short of full-scale war, according to a draft government proposal made available to reporters.

For now, however, Japan is likely to remain wary of putting boots on the ground in future multilateral operations such as the 1990-1991 Gulf War or the 2003 U.S.-led invasion of Iraq, activities Abe himself has ruled out.

The change will likely rile an increasingly assertive China, whose ties with Japan have chilled due to a maritime row, mutual mistrust and the legacy of Japan's past military aggression, but will be welcomed by Tokyo's ally Washington, which has long urged Japan to become a more equal partner in the alliance.

Abe's cabinet is expected to adopt as early as Tuesday a resolution revising a long-standing interpretation of the U.S.-drafted constitution to lift the ban after his ruling party finalizes an agreement with its junior partner.

Legal revisions to implement the change must be approved by parliament and restrictions could be imposed in the process.

"If this gets through the Japanese political system it would be the most significant change in Japan's defense policy since the Self-Defense Forces were established in 1954," said Alan Dupont, a professor of international security at the University of New South Wales in Sydney.

Since its defeat in 1945, Japan's military has not engaged in combat. While successive governments have stretched the limits of the U.S.-drafted pacifist charter not only to allow the existence of a standing military but also to permit non-combat missions abroad, its armed forces are still far more constrained legally than those in other countries.

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Conservatives say the charter's war-renouncing Article 9 has excessively restricted Japan's ability to defend itself and that a changing regional power balance including a rising China means Japan's security policies must be more flexible.

Abe, whose first term as premier ended when he abruptly quit in 2007, returned in triumph in December 2012 pledging to revive Japan's stagnant economy and bolster its global security clout. He has pushed for the change despite surveys showing voters are divided and wary.

"In my view, Japan is finally catching up with the global standard of security," said former Japanese diplomat Kunihiko Miyake. "Japan can now do as every other United Nations member under the U.N. charter."

EXISTENTIAL THREAT, CLEAR DANGER

According to the draft cabinet resolution, Japan could exercise force to the minimum degree necessary in cases where a country with which it has close ties is attacked and the following conditions are met: there is a threat to the existence of the Japanese state, a clear danger exists that the Japanese people's right to life, liberty and the pursuit of happiness could be subverted, and there is no appropriate alternative.

Precisely how the change might work in practice remains unclear. Junior coalition partner New Komeito is stressing that the scope of revision is limited, and Japanese voters are still wary of entanglements in conflicts far from home.

"Symbolically, it is a big step. The fundamental change to post-war Japanese security and defense policies which basically said we would defend ourselves but not help others by using force - philosophically this will be a fundamental change," said Narushige Michishita, a security expert at the National Graduate School for Policy Studies (GRIPS) in Tokyo.

But he added: "The Japanese people are not going to support a significant military commitment of Japan to foreign contingencies and wars, quite apart from how you could interpret the words."

Examples floated by the government of what the change could allow Japan's military to do range from defending a U.S. ship evacuating Japanese nationals and aiding a U.S. ship under attack near Japan to shooting down a ballistic missile headed for U.S. territory and taking part in international mine-sweeping operations when a conflict has closed vital sea lanes.

WELCOME SIGN FOR SOME IN SOUTHEAST ASIA

Some of the scenarios, however, have been dismissed by experts as a public relations exercise to persuade wary voters of the need for the change, rather than realistic possibilities.

Japan might, for example, be too busy coping with North Korean missiles headed for its territory to shoot down ones headed for America, some experts said.

Unforeseen contingencies, meanwhile, could also well arise.

"The idea of identifying specific cases is a red herring, because we never really know," said Richard Samuels, director of the Center for International Studies at the Massachusetts Institute of Technology. "What we need to know is whether an ally will help us."

The change will make it easier for Japan to take part in bilateral and multilateral military exercises with countries other than the United States, including Southeast Asian nations such as the Philippines that have maritime disputes with China and are welcoming Japan's expanded security role, GRIPS' Michishita said.

"It is not for joint war fighting, but for capacity building. It would be a very difficult step if we were to fight together," Michishita said.

Philippine President Benigno Aquino said after meeting Abe this week that Manila welcomed Japan's more assertive policy.

Critics say revising the interpretation of the constitution will gut pacifist Article 9 and make a mockery of formal amendment procedures, which are politically much tougher.

"Cabinets can change often. If we change the interpretation of the constitution each time the cabinet changes, the stability of law will be fundamentally overturned and we will be unable to exist as a constitutional state," Seiichiro Murakami, a ruling Liberal Democratic Party lawmaker who is a rare, outspoken critic of Abe, told a news conference.

Still, experts say the impact of Article 9 remains strong.

"They are still genuflecting to the constitution," said MIT's Samuels. "I think there is a lot left of Article 9. The Japanese public has made it clear that it is 'not so fast' in getting rid of it."

(Additional reporting by Nobuhiro Kubo, Kiyoshi Takenaka and Minami Funakoshi; Editing by Dean Yates)