TOKYO, March 13 (Reuters) - Japan will tweak its

military equipment transfer rules to allow exports of the jet

fighter it is developing with Britain and Italy, the country's

leader said on Wednesday, removing an obstacle that could have

stymied the project.

The joint Global Combat Air Programme (GCAP) last year

established a joint organisation and industry group led by

Britain's BAE Systems PLC, Japan's Mitsubishi Heavy

Industries ( MHVYF ) and Italy's Leonardo that aims to

deploy an advanced fighter by the middle of the next decade.

Without a loosening of Japan's military export rules, which

ban overseas sales of lethal equipment, Tokyo's partners would

have been unable to sell the aircraft abroad, which would cut

unit costs by spreading development expenses across more planes.

After months of political wrangling between Prime Minister

Fumio Kishida's ruling Liberal Democratic Party and its

coalition partner Komeito, the government has agreed to allow

exports to countries that have defence equipment transfer

agreements with Japan and are not embroiled in any conflicts,

Kishida told the country's parliament.

Each export will also require Cabinet approval and the rule

change will be limited to the GCAP fighter, he added.

Japan, Britain and Italy may involve other nations as junior

partners in GCAP. Saudi Arabia is among the contenders because

it would bring money and a lucrative market to a project

expected to cost tens of billions of dollars, sources have said.

Other companies involved in the project include European

missile maker MBDA, Japanese avionics manufacturer Mitsubishi

Electric Corp ( MIELF ), and engine makers Rolls-Royce PLC

, IHI Corp ( IHICF ), and Avio Aero.