TOKYO - Japan will forgo setting a ceiling on defense spending in next fiscal year's annual budget, the Nikkei newspaper reported on Saturday, highlighting Tokyo's interest in boosting defense at a time of tension with its powerful neighbour China.

The government usually sets a ceiling on spending requests submitted by ministries in crafting its annual state budget to avoid expenditures from increasing too much and straining Japan's already worsening finances.

Tokyo, however, will make defense expenditure an exception in next fiscal year's budget as it plans to increase spending on purchases of longer-range missiles and cyber security research, the paper said without citing sources.

Prime Minister Fumio Kishida's administration is set to make the decision this month, the Nikkei said.

The move would open scope for the government to respond to a proposal by the ruling party to increase defense spending to 2% of Japan's gross domestic product (GDP) within five years.

Up until now, annual defense spending has been capped at roughly 1% of GDP.

Japanese voters, fearing a slide into militarism, have traditionally been wary of big increases in defence spending, but many now worry that Russia's invasion of Ukraine may embolden China to attack neighbouring Taiwan.

In an annual economic policy roadmap released in June, the government said it wanted to drastically increase defense spending "within the next five years" in the first mention of a time frame for beefing up expenditure.

Analysts say a strong showing in an upper house election on July 10 has solidified Kishida's grip on power within his ruling party, giving him fresh momentum to hike defense spending to counter China's growing military might.

(Reporting by Leika Kihara Editing by Chris Reese and Diane Craft)