Japan will refuse to set a ceiling on defense spending in its annual budget for next fiscal year, the Nikkei newspaper reported, underscoring Tokyo's interest in strengthening defense at a time of tension with its powerful neighbor China.

The government usually sets a ceiling for spending requests submitted by ministries when it sets the annual state budget to avoid excessive increases in spending and strain on Japan's already deteriorating financial situation.

Tokyo, however, will make an exception for defense spending in next fiscal year's budget as it plans to increase spending on longer-range missile procurement and cybersecurity research.

Prime Minister Fumio Kishida's administration is expected to make a decision this month, Nikkei reported.

The move will give the government an opportunity to respond to the ruling party's proposal to increase defense spending to 2 percent of Japan's gross domestic product (GDP) over five years.

Until now, annual defense spending has been limited to about 1 percent of GDP.