By David Lague

(Reuters) - China's growing maritime power has emerged as the biggest challenge to the Japanese military since the collapse of the Soviet Union. Tokyo this year halted a decade of declining military outlays with an 0.8 per cent increase to 4.9 trillion yen ($48 billion)

Defense outlays next year are expected to increase more sharply by about 3 per cent according to senior Japanese military officials. Japanese military analysts believe their navy still holds a clear advantage in technology and firepower over its Chinese rival but the gap is closing.

"The Japanese Maritime Self Defense Force is the second-largest and second-most capable navy next to the U.S. navy," says retired Admiral Yoji Koda. "The Chinese navy is very much afraid of the Japanese navy's real capability." Koda and other security experts estimate that it will take China about 15 years to match the Japanese and U.S. naval power in East Asia if Beijing can maintain its double digit annual increases in military spending.

China this year increased its Defense budget by 10.7 per cent to $119 billion but some foreign experts estimate Beijing's real spending could be as high as $200 billion.

As Tokyo increases military outlays, it is also repositioning and re-equipping its military. Throughout the Cold War, the Japanese Self Defense Force concentrated the bulk of its firepower in its northern islands, ready to confront the Soviet Union and assist the U.S. navy in monitoring the powerful Russian submarine fleet.

Now Tokyo is in the early stages of redeploying its forces to the west to counter the sharply increased tempo of Chinese naval operations. And, in a sign that it is determined to counter any threat to far flung islands, including the Senkaku/Diaoyu group. The Japanese military is planning to introduce an amphibious landing force, akin to the U.S. marines, that could be deployed to defend outlying islands or landed to recover territory captured by a foreign invader.

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The first 700 members of the 3,000-strong force will be drawn from the army, according to the Japanese Defense Ministry. Japan already has a powerful fleet of helicopter carriers and amphibious landing ships that could support this type of operation. And, it is testing some new amphibious assault vehicles needed to land troops.

Recent exercises also suggest Tokyo's Defense planners are pre-occupied with threats to outlying islands. Just as China's latest major exercise around the Japanese archipelago drew to a close, Japan launched an 18-day exercise involving 34,000 troops that included an amphibious landing on an uninhabited atoll south of Okinawa. Earlier this year, 1,000 Japanese troops took part in a joint amphibious landing exercise in California with U.S. Marines.

(Reporting By David Lague)